1  /**
  2     A savings account earns interest on the minimum balance.
  3  */
  4  public class SavingsAccount extends BankAccount
  5  {
  6     private double interestRate;
  7     private double minBalance; 
  8  
  9     /**
 10        Constructs a savings account with a zero balance.
 11     */
 12     public SavingsAccount()
 13     {
 14        interestRate = 0;
 15        minBalance = 0;
 16     }
 17  
 18     /**
 19        Sets the interest rate for this account.
 20        @param rate the monthly interest rate in percent
 21     */
 22     public void setInterestRate(double rate)
 23     {
 24        interestRate = rate;
 25     }
 26  
 27     public void withdraw(double amount)
 28     {
 29        super.withdraw(amount);
 30        double balance = getBalance();
 31        if (balance < minBalance)
 32        {
 33           minBalance = balance;
 34        }
 35     }
 36     
 37     public void monthEnd()
 38     {
 39        double interest = minBalance * interestRate / 100;
 40        deposit(interest);
 41        minBalance = getBalance();
 42     }
 43  }

THE AFI STRATEGY FRAMEWORK

PART 1 Strategy Analysis CHAPTER 1 What Is Strategy and Why Is It Important? 2

CHAPTER 2 The Strategic Management Process 30

CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 54

CHAPTER 4 Internal Analysis: Resources, Capabilities, and Activities 84

CHAPTER 5 Competitive Advantage and Firm Performance 112

GAINING & SUSTAINING COMPETITIVE ADVANTAGE

Implementation 11. Organizational Design: Structure, Culture, and Control 12. Corporate Governance, Business Ethics, and Strategic Leadership

Formulation: Business Strategy 6. Business Strategy: Differentiation, Cost Leadership, and Integration 7. Business Strategy: Innovation and Strategic Entrepreneurship

Analysis: Getting Started 1. What Is Strategy and Why Is It Important? 2. The Strategic Management Process

P A

R T

1

Formulation: Corporate Strategy 8. Corporate Strategy: Vertical Integration and Diversification 9. Corporate Strategy: Acquisitions, Alliances, and Networks 10. Global Strategy: Competing Around the World

External and Internal Analysis 3. External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 4. Internal Analysis: Resources, Capabilities, and Activities 5. Competitive Advantage and Firm Performance

P A

R T

1

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9

LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.

LO 1-2 Define strategy and explain its role in a firm’s quest for competitive advantage.

LO 1-3 Explain the role of firm effects and industry effects in determining firm performance.

LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation.

LO 1-5 Outline how business models put strategy into action.

LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century.

LO 1-7 Critically evaluate the role that different stakeholders play in the firm’s quest for competitive advantage.

LEARNING OBJECTIVES After studying this chapter, you should be able to:

1C H A P T E R

What Is Strategy and Why Is It Important?

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10 Managing Stratregy in The Global Marketplace

CHAPTERCASE 1

The Premature Death of a Google Forerunner at Microsoft

I N 1998, 24-year-old Sergey Brin and 25-year-old Larry Page founded Google. They met as grad- uate students in computer science at Stanford University, where they began working together on a web crawler, with the goal of improv-

ing online searches. What they developed was the PageRank algorithm, which returns the most rel- evant web pages more or less instantaneously and ranks them by how often they are referenced on other impor- tant web pages. A clear improve- ment over early search engines such as AltaVista, Overture, and Yahoo, all of which indexed by keywords, the PageRank algo- rithm is able to consider 500 mil- lion variables and 3 billion terms. What started as a homework assignment launched the two into an entrepreneurial venture when they set up shop in a garage in Menlo Park, California.

Today, Google is the world’s leading online search and advertising company, with some 70 percent market share of an industry estimated to be worth more than $25 billion a year, and that is growing quickly. Though Yahoo is a distant second with less than 20 percent share, in 2008 Microsoft’s CEO Steve Ballmer offered to buy the runner-up for close to $50 billion to help his company gain a foothold in the paid-search business where Google rules. Yahoo turned down the offer.

What haunts Ballmer is that Microsoft actually had its own working prototype of a Google forerun- ner, called Keywords, more than a decade earlier.

Scott Banister, then a student at the University of Illinois, had come up with the idea of adding paid advertisements to Internet searches. He quit college and drove his Geo hatchback to the San Francisco Bay Area to start Keywords, later joining an online ad company called LinkExchange. In 1998, Microsoft bought LinkExchange for some $265 million (about one two-hundredth the price it would later offer for Yahoo). LinkExchange’s managers urged Microsoft to invest in Keywords. Instead, Microsoft execu- tives shut down LinkExchange in 2000 because they did not see a viable business model in it. One LinkExchange manager actually approached Ballmer himself and explained that he thought Microsoft was making a mistake. But Ballmer said he wanted to manage through delegation and would not reverse

a decision made by managers three levels below him. Thus ended Microsoft’s first online advertising venture.

In 2003, Microsoft got a sec- ond chance to enter the online advertising business when some of its mid-level manag- ers proposed buying Overture Services, an innovator in com- bining Internet searches with advertisements. This time,

Ballmer, joined by Microsoft’s co-founder Bill Gates, decided not to pursue the idea because they thought Overture was overpriced. Shortly thereafter, Yahoo bought Overture for $1.6 billion.

Having missed two huge opportunities to pur- sue promising strategic initiatives that emerged from lower levels within the firm, Microsoft has been playing catch-up in the paid-search business ever since. In the summer of 2009, it launched its own search engine, Bing. Microsoft’s new search engine will also power Yahoo searches, after the two announced a strategic alliance. These two stra- tegic moves helped Microsoft increase its share in the lucrative online search business to roughly

3

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Strategic Management: Concepts 11

4

25 percent, up from just over 8 percent. It remains an open question whether this is sufficient, how- ever, to challenge Google’s dominance. In particular,

Bing’s increase in market share of online searches is obtained at the expense of Yahoo’s, and not Google’s, market share.1

After reading the chapter, you will find more about this case, with related questions, on page 21.

▲ HOW DID A STARTUP  by two college students outperform Microsoft, one of the world’s leading technology companies, in online search and advertising? Why is Google successful in the online search business while Yahoo is struggling? For that matter, why is any company successful? What enables some firms to gain and then sustain their com- petitive advantage over time? Why do once-great firms fail? How can a firm’s managers influence performance?

Answering these questions requires integrating the knowledge you’ve obtained in your studies of different business disciplines (such as accounting, finance, economics, market- ing, operations, IT management, organizational behavior, and human resource manage- ment) to understand what leads to superior performance. Strategic management, the topic of this course and this book, is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. The AFI strategy framework shown on the part-opening page (page 1) embodies this view of strategic man- agement. In this chapter, we lay the groundwork for the study of strategic management by introducing some foundational ideas about strategy and competitive advantage, and by looking at the components of the AFI framework.

WHAT STRATEGY IS: GAINING & SUSTAINING COMPETITIVE ADVANTAGE The desire to perform better than our competitors applies to nearly every area of our lives. Universities compete for the best students and professors. Startup firms compete for financial and human capital. Existing companies compete for future growth, and employ- ees compete for raises and promotions. University professors compete for research grants, and college students for jobs and graduate school admission. Political candidates compete for votes, and charities for contributions.

In every competitive situation, the winners are generally those with the better strategy. In general terms, strategy is the planned and realized set of actions a firm takes to achieve its goals. For instance, the general manager of the Oakland A’s, Billy Beane, applied a sophisticated analysis to formulate and implement a new strategy.2 Beane began by devis- ing new metrics to assess a player’s potential and performance more accurately. These met- rics, in turn, allowed the Oakland A’s to field a low-cost team that could compete against much richer rivals in Major League Baseball. Taken together, strategy governs the ubiqui- tous quest for superior performance.

What Is Competitive Advantage? A firm that formulates and implements a strategy that leads to superior performance relative to other competitors in the same industry or the industry average has a com- petitive advantage. Google has a competitive advantage over Microsoft, Yahoo, and others competing in the online search and advertising business. A firm that is able to outperform its competitors or the industry average over a prolonged period of time has a

>> LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.

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12 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 5

sustainable competitive advantage.3 It appears that Google has a sustainable competi- tive advantage, because it has outperformed its rivals consistently over time. Yet, past performance is no guarantee of future performance. Microsoft, Yahoo, and others are working hard to neutralize Google’s competitive advantage.

In both business and sports, strategy is about outperforming one’s rivals. Identifying the winner in a sporting event, however, is relatively easy. In 2011, the University of Connecticut Huskies won the NCAA basketball championship, beating the Butler University Bulldogs 54-41 in the title game. We could say that the UConn Huskies gained a temporary competitive advantage. To answer the question of who has a sustainable competitive advantage, however, is a bit trickier. Here, we need to look at the recent history of tournaments. If we say, for exam- ple, that 10 years is an appropriate time period over which to assess the sus- tainability of competitive advantage (2002–2011), then we find that seven teams were victorious: the University of Connecticut, the University of Florida (Gators), and the University of North Carolina at Chapel Hill (Tar Heels) each two times; and Duke University, the University of Kansas, Syracuse University, and the University of Maryland each one time. We could argue that over this 10-year period the Huskies, the Gators, and the Tar Heels enjoyed a sustainable competitive advan- tage over other NCAA teams. Since competitive advantage needs to be assessed relative to other competitors, we can only say that the Huskies, Gators, and Tar Heels, although outperforming the other contenders, performed at a similarly high level. This example shows that assessing competitive advantage, let alone sustainable competitive advantage, is not an easy task.

In business, we have no absolute measure of performance for competi- tive advantage as we do for height or weight or NCAA tournament victories. Rather, we compare performance to a benchmark, either the performance of other firms in the same industry or an industry average. If a firm underper- forms its rivals or the industry average, for instance, it has a competitive disadvantage. A 15 percent return on invested capital (RoIC) may sound like superior firm performance, but in the energy industry where the average RoIC has been above 20 percent the last few years, it is actually a competitive disadvantage. In contrast, if a firm’s RoIC is 5 percent in a commodity indus- try like steel, where the industry average is 1–2 percent, then the firm has a c ompetitive advantage. Should two or more firms perform at the same level, they have competitive parity.

If other companies can easily imitate a firm’s source of competitive advan- tage, then any edge the firm gains is short-lived. But if the advantage is difficult to understand or imitate, the firm can sustain it over time. Patents, for example,

strategic management An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage.

competitive advantage Superior performance relative to other competitors in the same industry or the industry average.

sustainable competitive advantage Outperforming competitors or the industry average over a prolonged period of time.

competitive disadvantage Underperformance relative to other competitors in the same industry or the industry average.

competitive parity Performance of two or more firms at the same level.

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Strategic Management: Concepts 13

6 PART 1 | Strategy Analysis

often p rotect certain products from direct imitation for a period. Pfizer’s Lipitor, a patent- protected cholesterol-lowering drug, is the best-selling prescription drug ever, grossing some $14 billion dollars in revenues each year between 2006 and 2009.4 This highly suc- cessful product contributed to a competitive advantage for Pfizer, accounting for roughly one-third of its total annual revenues.5 The patent on Lipitor expired in 2010, however, allowing generic drug makers to copy the drug and offer it at much lower prices, eroding Pfizer’s competitive advantage.

What Is Strategy? Strategy describes the goal-directed actions a firm intends to take in its quest to gain and sustain competitive advantage.6 The firm that possesses competitive advantage provides superior value to customers at a competitive price or acceptable value at a lower price. Profitability and market share are the consequences of superior value creation. Henry Ford was driven by his ambition to mass-produce a reliable car at a low cost. Larry Page and Sergey Brin were motivated to create a better search engine. For Ford, Page, and Brin, and numerous other businesspeople, making money was the consequence of providing a prod- uct or service consumers wanted. The important point here is that strategy is about creating superior value, while containing the cost to create it. The greater the difference between value creation and cost, the greater the economic contribution the firm makes, and thus the greater the likelihood for competitive advantage.

Strategy is not, however, a zero-sum game—it’s not always the case that one party wins while all others lose. Many strategic successes are accomplished when firms or individuals cooperate with one another.7 Even direct competitors cooperate occasion- ally, to create win–win scenarios. When competitors cooperate with one another to achieve strategic objectives, we call this co-opetition.8 The new Cell microprocessor, which powers the PlayStation 3 game console, was the result of a collaborative effort among IBM, Toshiba, and Sony—companies that directly compete with one another in other markets.

We’ve noted that to gain a competitive advantage, a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods or services similar to the competitors’ but at a lower price. The essence of strategy, therefore, is being different from rivals and thus unique. Managers accomplish this difference through strate- gic positioning, staking out a unique position in an industry that allows the firm to provide value to customers, while controlling costs.

Strategic positioning requires trade-offs, however. As a low-cost retailer, JCPenney has a clear strategic profile and serves a specific market segment. Upscale retailer Neiman Marcus also has built a clear strategic profile by providing superior customer service to a specific (luxury) market segment. While the companies are in the same industry, their respective customer segments overlap very little, if at all, and thus they are not direct com- petitors. To keep it that way, their managers must make conscious trade-offs that enable both to strive for competitive advantage in the same industry.

As emphasized by Michael Porter of Harvard Business School, strategy is as much about deciding what not to do, as it is about deciding what to do. Because the supply of resources is not unlimited, managers must carefully consider their business strategy choices in their quest for competitive advantage. Trying to be everything to everybody would be a recipe for inferior performance. For example, to ward off successful low-cost entrants like Southwest Airlines (SWA), Continental and Delta added low-cost Continental

>> LO 1-2 Define strategy and explain its role in a firm’s quest for competitive advantage.

strategy The goal- directed actions a firm intends to take in its quest to gain and sustain competitive advantage.

co-opetition Cooperation by competitors to achieve a strategic objective.

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14 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 7

Lite and Delta’s Song to their core hub-and-spoke businesses. Their managers fell prey to the illusion that they could straddle a low-cost leadership position (already well-executed by SWA) and their existing differentiation strategy of serving a large number of destina- tions. Both new ventures failed because they left Continental and Delta stuck in the middle, leading to inferior performance in both markets. (We’ll consider different business strate- gies in more depth in Chapter 6.)

Strategy as a Theory of How to Compete A firm’s strategy can be seen as its managers’ theory about how to gain and sustain com- petitive advantage. A theory answers the questions, what causes what and why?9 It’s a contingent statement based on assumptions about how the world works. Based on the law of gravity, for example, we can predict what will happen if you drop something out the window—without your having to do it to find out. As the old adage goes, nothing is more practical than a good theory. Based on their assumptions about competitive conditions— that is, the relative value of their firm’s resources and capabilities as compared to those of their collaborators and competitors, predictions about the actions that competitors may initiate, and the development of trends in the external environment—managers express their theory of how to gain and sustain competitive advantage in the strategy they set for the firm.10 As we will see in Chapters 3 and 4, a firm can gain competitive advantage by leveraging its internal resources, capabilities, and relationships to exploit opportunities in its external environment.

Strategy as a theory of how to compete provides managers with a roadmap to navi- gate the competitive territory. The more accurate the map, the better strategic decisions managers can make. In the competitive world, managers test their theories in the mar- ketplace. Positive feedback validates managers’ strategic assumptions: “iPhone sales vastly exceeded expectations, so it must have been the right product at the right time.” Negative feedback allows managers to adjust their assumptions: “The Apple Newton flopped [in 1993], so its price—over $1,000 in today’s dollars—and bulkiness weren’t right for the PDA market at that time.” The Newton’s failure, however, laid the foundation for later successes such as Apple’s iPhone and the iPad. Competitors also learned from the Newton debacle: They subsequently introduced improved products, including Palm’s Pilot, Handspring’s Visor, and RIM’s BlackBerry, at a lower price. A firm’s relative per- formance in the competitive marketplace provides managers with the necessary feedback to assess how well their strategy works in their quest for competitive advantage. The strategic management process, therefore, is a never-ending cycle of analysis, formulation, implementation, and feedback.

Walmart became the world’s largest retailer in part due to founder Sam Walton’s accurate assumptions about the connection between low retail prices in underserved rural and suburban areas and high volume, thus generating the ability to be the low- price leader in mass-merchandising.11 His insight of how to do things differently in the retail industry created a competitive advantage for his firm. Later, Walmart reinforced its competitive advantage with a revolutionary IT system that tracks sales in real time and allows just-in-time deliveries. For the year 2008, one of the worst stock performance years on record, the Dow Jones Industrial Average fell 34 percent, yet Walmart’s shares actually rose 18 percent, outperforming the average of the 30 blue-chip firms by 52 per- centage points. The reason? When managers align their assumptions closely with com- petitive realities, they can draft and implement a successful strategy that yields superior

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Strategic Management: Concepts 15

8 PART 1 | Strategy Analysis

firm performance. Walmart’s cost leadership strategy became even more valuable in a time of economic hardship.

In contrast, when managers’ theories of how to gain and sustain competitive advantage do not reflect reality, their firm’s strategy will destroy rather than create value and will lead to inferior performance. The U.S. auto manufacturers Chrysler, Ford, and GM have fallen on hard times partly because their managers built their strategies around the flawed assump- tions that gasoline prices would remain low and U.S. drivers would continue to want big trucks and sport utility vehicles. These were also the only vehicles that U.S. car manufac- turers, given their inflated cost structure, could sell at a profit. The Ford F-150 pickup truck is the most-sold vehicle of all time in the United States, and the Hummer (about 8 miles per gallon) was once one of GM’s most profitable vehicles. When gas prices rose above $4 per gallon in the summer of 2008 (up from less than $2.50 a gallon just a year earlier), consumer preferences for more fuel-efficient and “green” cars increased.

Meanwhile, in Japan where gas prices have always been high, Toyota’s managers had begun to think as early as the 1990s about how fuel efficiency and possible regulation would influence consumer behavior. So while Toyota provided large SUVs and pickup trucks to meet U.S. market demand, it also developed hybrid vehicles to compete in an environment of increased regulation, higher gas prices, and heightened consumer concerns about the ecological impact of gas-guzzling cars. In 1997, Toyota launched the Prius (60 miles per gallon), which has since sold more than 2 million units. Because the strate- gies of U.S. car manufacturers were based on flawed assumptions and each manufacturer had long-term resource commitments that were not easily reversible, U.S. car manufac- turers did not have a competitive fuel-efficient (or hybrid) vehicle.12 The poor financial performance that followed was the logical consequence of a strategy that no longer fit the competitive realities. In 2009, both GM and Chrysler filed for bankruptcy. Engineering a shrewd strategic turnaround, Ford (which, by the way, did not receive a government bail- out) is experiencing a resurgence.13

Industry vs. Firm Effects in Determining Performance Managers’ actions tend to be more important in determining firm performance than the forces exerted upon the firm by its external environment. Thus, firm effects—the results of managers’ actions to influence firm performance—tend to have more impact than indus-

try effects—the results attributed to the choice of industry in which to compete.14 Based on a number of empirical studies, academic researchers found that the industry a firm is in determines about 20 per- cent of a firm’s profitability, while the firm’s strategy within a given industry explains between 30–45 percent of its performance.15 These findings are depicted in Exhibit 1.1. Although a firm’s industry envi- ronment is not quite as important as the firm’s strategy within its industry, they jointly determine the firm’s overall performance.

Astute managers create supe- rior performance through strategy.

Industry Effects

~20% Other Effects

~35%–50%

Firm Effects

~30%–45%

(corporate parent, year effects, unexplained variance)

EXHIBIT 1.1

Industry, Firm, and Other Effects Explaining Superior Firm Performance

firm effects The results of managers’ actions to influence firm performance.

industry effects The results attributed to the choice of industry in which to compete.

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16 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 9

They leverage a company’s strengths while mitigating its weaknesses. They turn exter- nal threats into opportunities. Strategy generally requires making important trade-offs (think low-cost Kia versus luxury Ferrari in the car industry). Indeed, some of the big- gest advances in competitive positioning have been accomplished when managers resolved apparent trade-offs. Toyota introduced lean manufacturing to resolve the trade-off between quality and cost. This process innovation allowed Toyota to produce higher- quality cars at a lower unit cost, and to perfect the mass customization of cars. Lean manufacturing, over time, has become a necessary but not sufficient condition for competitive advantage in the auto industry. Today, if a carmaker can’t produce high-quality, mass-customized cars at low cost, it is not even in the game. More recently, Toyota stumbled as questions arose whether the company could maintain its stellar quality record while growing so fast. Korea’s Hyundai stepped into this void, offering cars that surpass Toyota in quality while attempting to provide luxury similar to Lexus vehicles.16 Hyundai’s managers carved out a strong strategic position for the company by focusing on resolving the trade-offs between luxury, quality, and cost. The ups and downs in the car industry clearly show that competi- tive advantage is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic management aid managers in this impor- tant challenge.

What Strategy Is Not To gain a deeper understanding of what strategy is, it is helpful to know what strategy is not.17 You will hear many people today refer to a host of different plans and activities as pricing strategy, Internet strategy, alliance strategy, operations strategy, IT strategy, brand strategy, marketing strategy, HR strategy, and so on. While all these elements may be part of a firm’s functional strategy to support its business model (see the next section), we will reserve the term strategy for describing the firm’s overall efforts to gain and sustain com- petitive advantage.

Nor is competitive benchmarking “strategy.” Best-in-class practices such as just-in-time inventory, enterprise resource planning (ERP) systems, and Six Sigma quality initiatives all fall under the umbrella of tools for operational effectiveness. Being best-in-class is a sufficient but not a necessary condition for competitive advantage. Take this idea to its extreme in a quick thought experiment: If all firms in the same industry pursued Six Sigma in the same fashion, all would have identical cost structures and none could gain a competi- tive advantage. Indeed, competition would be cut-throat because all firms would be more or less the same, but very efficient. Everyone would be running faster, but nothing would have changed in relative strategic positions.

Rather than focusing on copying a competitor, the key to successful strategy is to combine a set of activi- ties to stake out a unique position in an industry. Competitive advantage has to come from performing activities differently than rivals do. Operational effectiveness, marketing skills, and other functional expertise, along with best practices, contribute to a unique strategic position, but by themselves they are not a substitute for strategy. Exhibit 1.2 summarizes the concept of strategy.

>> LO 1-3 Explain the role of firm effects and industry effects in determining firm performance.

Definition: Strategy is the quest to gain and sustain competitive advantage.

• It is the managers’ theories about how to gain and sustain competitive advantage.

• It is about being different from your rivals.

• It is about creating value while containing cost.

• It is about deciding what to do, and what not to do.

• It combines a set of activities to stake out a unique position.

• It requires long-term commitments that are often not easily reversible.

EXHIBIT 1.2

What Is Strategy?

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Strategic Management: Concepts 17

10 PART 1 | Strategy Analysis

FORMULATING STRATEGY ACROSS LEVELS: CORPORATE, BUSINESS, AND FUNCTIONAL MANAGERS Strategy formulation concerns the choice of strategy in terms of where and how to compete. To understand the interdependencies across different levels, it is helpful to break down strategy formulation into three distinct levels: corporate, business, and functional.

Corporate strategy involves decisions made at the highest level of the firm about where to compete. Corporate executives need to decide in which industries, markets, and geog- raphies their company should compete, as well as how they can create synergies across business units that may be quite different. They are responsible for setting overarching strategic goals and allocating scarce resources, among the different business divisions, monitoring performance, and making adjustments to the overall portfolio of businesses when needed. Corporate executives determine the scope of the business, deciding whether to enter certain industries and markets and whether to sell certain divisions. The objective of corporate-level strategy is to increase overall corporate value. Over the last 20 years, due to a new corporate-level strategy, IBM’s CEO Sam Palmisano and his predecessors have transformed IBM from a hardware company to a global IT services firm. It even sold its PC unit to Lenovo, a Chinese high-tech company as part of the transformation process.

Exhibit 1.3 shows that corporate strategy is formulated at headquarters, and that busi- ness strategy occurs within strategic business units, the standalone divisions of a larger conglomerate, each with its own profit-and-loss responsibility. General managers in stra- tegic business units (SBUs) must answer the strategic question of how to compete in order to achieve superior performance within the business unit. Currently, for example, IBM has four strategic business units or divisions: hardware, software, technology services, and financing. General managers are responsible for formulating a strategic position for their business unit. The technology services SBU at IBM is led by a senior vice president, who has profit-and-loss responsibility for IBM’s technology services worldwide. The same goes for the heads of the other three SBUs at IBM.

Headquarters Corporate Strategy Where to Compete?

SBU 1 Business Strategy How to Compete?

SBU 2 Business Strategy How to Compete?

SBU 3 Business Strategy How to Compete?

Business Function 1 Functional Strategy How to Implement

Business Strategy?

Business Function 2 Functional Strategy How to Implement

Business Strategy?

Business Function 3 Functional Strategy How to Implement

Business Strategy?

Business Function 4 Functional Strategy How to Implement

Business Strategy?

EXHIBIT 1.3

Strategy Formulation and Implementation Across Levels: Corporate, Business, and Functional Strategy

strategic business unit (SBU) A standalone division of a larger conglomerate, with its own profit-and- loss responsibility.

>> LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation.

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18 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 11

Within each SBU are various business functions such as accounting, finance, human resources, information technology, product development, operations, marketing, and cus- tomer service. Each functional manager is responsible for decisions and actions within a single functional area that aid in the implementation of the business-level strategy. A man- ager in IBM’s product-development function, for example, may be responsible for encour- aging new product offerings. The set of functional strategies enables the general managers of the SBUs to pursue their respective business-level strategy, which in turn needs to be in line with the overall corporate-level strategy.

Functional managers, who are closer to the final products, services, and customers than managers at higher levels, may sometimes be able to come up with strategic initiatives that may influence the direction of the company. One functional manager at IBM, for instance, suggested entry into the life sciences field.18 In 2000, she saw a business opportunity for IBM, in which application of high-performance computing and information technology could solve thorny problems that accompanied data-intensive work such as decoding human genomes and furthering personalized medicine. IBM’s general and corporate man- agers supported this strategic initiative, dubbed “information-based medicine.”19 This new business opportunity generated more than $5 billion in revenue by 2006.

BUSINESS MODELS: PUTTING STRATEGY INTO ACTION We’ve said that strategy denotes the managers’ theories of how to compete, but theory alone is useless if it is not put into action. The translation of strategy into action takes place in the firm’s business model, which details the firm’s competitive tactics and initiatives. Simply put, the firm’s business model explains how the firm intends to make money. If it fails to translate a strategy into a profitable business model, the firm will cease to exist. To come up with a business model, the firm first transforms its theory of how to compete into a blueprint of actions and initiatives that support the overarching strategy. In a second step, the organization implements this blueprint through structures, processes, culture, and procedures.

The so-called razor–razor-blade business model is a famous example. The idea is to give away or sell for a small fee the product and make money on the replacement part needed. As the name indicates, it was invented by Gillette, which gave away its razors and sold the replacement cartridges for relatively high prices. The razor–razor-blade model is found in many business applications today. For example, HP charges very little for its laser printers but imposes high prices for its replacement cartridges.

Similarly, telecommunications companies provide a basic cell phone at no charge or significantly subsidize high-end smartphones when you sign up for a two-year wireless service plan. They combine the razor–razor-blade model with the subscription-based busi- ness model, which was first introduced by magazines and newspapers. They recoup the subsidy provided for the smartphone by requiring customers to sign up for lengthy service plans. The leading provider of audio books, Audible, a subsidiary of Amazon, also uses a subscription-based business model.

The opening case foreshadows the up-and-coming battle between Google and Microsoft as each moves progressively on to the other’s turf. Although Google started out as an online search and advertising company, it now offers software applications (Google Docs, word processing, spreadsheet, e-mail, interactive calendar, and presentation software) and oper- ating systems (Chrome OS for the web and Android for mobile applications), among many other online products and services. In contrast, Microsoft began its life by offering an oper- ating system (since 1985, called Windows), then moved into software applications with its

>> LO 1-5 Outline how business models put strategy into action.

business model Organizational plan that details the firm’s competitive tactics and initiatives; in short, how the firm intends to make money.

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12 PART 1 | Strategy Analysis

Office Suite, and now into online search and advertising with Bing. Thus, the stage is set for a clash of the technology titans.

In fighting this battle, Google and Microsoft pursue very different business models, as shown in Exhibit 1.4.20 Google offers its applications software Google Docs for free to induce and retain as many users as possible for its search engine. Although Google’s flag- ship search engine is free for the end user, Google makes money from sponsored links by advertisers. The advertisers pay for the placement of their ad on the results pages and every time a user clicks through an ad (which Google calls a “sponsored link”). Thus, many bil- lion mini-transactions add up to a substantial business. As indicated in Exhibit 1.4, Google uses part of the profits earned from its lucrative online advertising business to subsidize Google Docs. Giving away products and services to induce widespread use allows Google to benefit from network effects—the increase in the value of a product or service as more people use it. Thus, Google can charge advertisers for highly targeted and effective ads, allowing it to subsidize other product offerings that compete directly with Microsoft.

Microsoft’s business model is almost the reverse of Google’s. Initially, Microsoft focused on creating a large installed base of users for its PC operating system (Windows). It now holds some 90 percent market share in operating system software worldwide. Once the users are locked into a Microsoft operating system (which generally comes preloaded with the computer they purchased), they then want to buy applications that run seamlessly with the operating system. The obvious choice for most users is Microsoft’s Office Suite (containing Word, Excel, PowerPoint, Outlook, and Access), but they need to pay several hundred dollars for the latest version. As shown in Exhibit 1.4, Microsoft uses the profits from its application software business to subsidize its search engine Bing, which is—just like Google’s—a free product offering for the end user. Given Bing’s relatively small mar- ket share, however, and the tremendous cost in developing the search engine, Microsoft, unlike Google, does not make any money from its online search offering; rather, it is a big money loser. The logic behind Bing is to provide a countervailing power to Google’s dominant position in online search. The logic behind Google Docs is to create a threat to Microsoft’s dominant position in application software. These strategies create multi-point competition between the two technology firms.21 Taken together, Google and Microsoft compete with one another for market share in several different product categories through quite different business models.

Microsoft

Google

Medium Cost for OEMs

Windows

High Cost for Users

Office Suite

Free for User (Loss Leader)

Bing

Free for User

Free for User

Free for User High Cost for Advertisers

Chrome OS & Android

Google Docs

Google

Operating Systems

Software Apps

Online Search

EXHIBIT 1.4

Competing Business Models: Google vs. Microsoft

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20 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 13

STRATEGY IN THE 21ST CENTURY As the adage goes, change is the only constant—and the rate of change appears to be increasing.22 Changing technologies spawn new industries, while others die out. Managers today face an increasingly competitive world and a truly global marketplace. These trends, rapid technological change and increasing globalization, dramatically affect how to for- mulate and implement an effective strategy in the 21st century. Here we expand on the impact of key trends (accelerating technological change, a truly global world, and future industries) that will affect strategy making in the 21st century.

Accelerating Technological Change The rate of technological change has accelerated drastically over the last hundred years. Exhibit 1.5 shows how many years it took for different technological innovations to reach 50 percent of the U.S. population (either through ownership or usage). As an example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.

What factors explain rapid technological diffusion and adoption? One factor is that initial innovations like the car, airplane, telephone, and use of electricity provided the necessary infrastructure for newer innovations to diffuse more rapidly. Another reason is the emer- gence of new business models that make innovations more accessible. For example, Dell’s direct-to-consumer distribution system improved access to low-cost PCs, and Walmart’s low-price, high-volume model utilized its sophisticated IT logistics system to fuel explo- sive growth. In addition, satellite and cable distribution systems facilitated the ability of mass media such as radio and TV to deliver advertising and information to a wider audi- ence. The speed of technology diffusion has accelerated further with the emergence of the Internet, social networking sites, and viral messaging.

The life experience of the Gen-Y population reflects the accelerated pace of technology diffusion. New technologies are a natural part of their lives, like eating and breathing. The

Years

CarAirplaneTelephoneElectricityVCR Microwave

RadioTV

8475715237353328

MP3

Internet

6 10 14

Cell Phone

PC

19

50 %

O w

ne rs

hi p

/ U se

(U .S

.) EXHIBIT 1.5

Accelerating Speed of Technological Change Source: Data from U.S. Census Bureau; Consumer Electronics Association; Forbes; and National Cable and Telecommunications Association.

>> LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century.

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Strategic Management: Concepts 21

14 PART 1 | Strategy Analysis

Gen-Y cohort came of age during the boom of the Internet; its members are accustomed to constant connectivity and to rapid technological change. By the time they graduate from col- lege, the average Gen-Y student has spent over 10,000 hours playing video games and over 20,000 hours watching TV.23 The Gen-Y cohort is sometimes called digital natives—people who grew up with the Internet and other advanced technologies and who need no help to adapt to new technologies.24 Those who did not grow up with the Internet and other advanced technologies, and so have taken longer to adapt to them, are called digital immigrants. We discuss the strategic implications of innovation and technological change in Chapter 7.

A Truly Global World New York Times columnist and author Thomas Friedman used his book title, The World Is Flat,25 to describe a truly global marketplace in which goods, services, capital, knowledge, ideas, and people move freely across geographic boundaries in search of greater oppor- tunities. Advances in information technology and transportation have led to the “death of distance.”26

Due to falling trade and investment barriers, companies are now part of a global economy made up of several key markets. Combining 27 member states and more than 500 million people, the European Union (EU) is the world’s largest economy.27 Sixteen EU countries are almost a fully integrated bloc with unified economic and monetary policies, using the euro as a common currency.28 China, with more than 1.4 billion people, is the most populous country in the world, and India, with 1.2 billion people, is the world’s larg- est democracy. Together with Brazil and Russia, they make up the BRIC countries, which have more than 40 percent of the world’s population and occupy more than a quarter of the world’s landmass. This group of fast-growing, emerging economies could one day eclipse the richest countries in the world.

Many U.S. companies have become global players. The technology giant IBM employs 425,000 people and has revenues of roughly $100 billion. Although IBM’s headquarters

is in Armonk, NY, the vast majority of its employees (more than 70 percent) actu- ally work outside the United States. IBM, like many other U.S.-based multination- als, now earns the majority of its revenues (roughly two-thirds) outside the United States (as shown in Exhibit 1.6).29 IBM’s revenues in the BRIC countries have been growing at between 20 and 40 percent per year, while they have grown by only about 1 to 3 percent in developed markets such as the United States. IBM’s goal is to obtain 35 percent of its total revenue from fast-growing emerging economies such as the BRIC countries by 2015. To cap- ture these opportunities, IBM (along with many other multinational companies) has been reducing the U.S. headcount while increasing employment in emerging economies such as India.30

While many multinational companies like Coca-Cola, Procter & Gamble, and

U.S.

36%

Europe/ Middle East/Africa

33%

Asia Pacific

24%

Americas

7%

EXHIBIT 1.6

Geographic Sources of IBM Revenues, 2010 Source: 2010 IBM Annual Report.

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22 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 15

Sony tend to focus on more affluent customers, some 4 billion people on the planet live on less than $2,000 a year (or $5.50 a day).31 Recently, scholars have shown that this so-called bottom of the pyramid of the global economy—the largest but poorest socioeconomic group of the world’s population—can yield significant business opportunities, which—if satisfied—could improve the living standard of the world’s poorest.32 Muhammad Yunus, winner of the 2006 Nobel Peace Prize, founded Grameen Bank in Bangladesh to provide small loans (so-called microcredit) to impoverished villagers. Loans provided funding for their entrepreneurial ventures so that villagers could help themselves climb out of poverty. As a follow-up business, Grameen Telecom now offers a microloan combined with a cell phone for local entrepreneurs. Other businesses have also found profitable business oppor- tunities at the bottom of the pyramid. In India, Arvind Mills offers jeans in a ready-to-make kit that costs only a fraction of the high-end Levi’s. The Tata Group, a widely diversified multinational conglomerate headquartered in Mumbai, India, in 2009 introduced its Nano car, the lowest-priced car in the world.33 Although the Nano sells for less than $2,500 (“one lakh” rupees), sales of hundreds of millions of them can add up to a substantial business. Given its importance, we take up global strategy in Chapter 10.

Future Industries Tomorrow’s winners are the ones that focus today on making investments to build a posi- tion in up-and-coming industries. Given current trends, several industries promise signifi- cant potential for value creation (and thus career opportunities), among them health care, the green economy, and Web 2.0.34

HEALTH CARE. In 2010, U.S. health care spending reached $2.5 trillion, or 16 percent of total economic activity, making it the largest industry in the country.35 With aging baby boomers making up the largest age demographic in the United States, the growth of the health care industry, estimated at 7 percent annually, will far outstrip the growth rate of the overall economy. As a consequence, by 2019 the health care sector is estimated to be 20 percent of total U.S. economic activity.

Not only are baby boomers a large part of the U.S. population, most of the wealth is also concentrated in this group. As baby boomers age, they will demand more professional health care, wellness and enhancement services such as Botox treatments, liposuction, and laser eye surgery. Important medical breakthroughs in biotechnology, nanotechnology, and genomics will allow health care providers to offer individualized medicine to support lon- ger and healthier living. For example, 23andMe, an entrepreneurial venture founded by Anne Wojcicki and Linda Avey, leverages the convergence of IT, genomics, and biotech- nology to allow customers to understand their own unique genetic makeup in terms of health, traits, and ancestry. After having one’s personal DNA tested, 23andMe will provide an individualized profile of how that genetic makeup is related to the probability of devel- oping any of over 100 different diseases and conditions.

Given the opportunities in the health care industry, GE announced its healthymagination initiative, in which it will invest $6 billion to attempt to solve strategic trade-offs in health care by increasing access, improving quality, and lowering costs.36 Patterned after its suc- cessful ecomagination program, this initiative allows GE to draw on the expertise of its various business units. It is intended to refocus GE on its industrial strength, but in a way that looks to emerging opportunities.

Although the health care sector of the economy seems to provide significant business opportunities in the future due to favorable demographics in the U.S. and most devel- oped economies, managers must also consider impending threats such as more govern- ment regulation. While more Americans will be required to have health insurance, the

bottom of the pyramid The largest but poorest socioeconomic group of the world’s population.

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Strategic Management: Concepts 23

16 PART 1 | Strategy Analysis

reimbursements for specific procedures are likely to go down. This will decrease the incen- tives for firms to make investments in this industry and for students to become nurses or medical doctors. Health care providers, moreover, face the challenge of squaring a circle when required by law to provide more access, equal- or higher-quality care, and lower cost. One possible way to resolve this trade-off is innovation in products and processes, a topic that we will take up in Chapter 7.

GREEN ECONOMY. The vast majority of today’s economic activity around the globe is powered by carbon-based sources of energy such as oil, coal, and natural gas. Yet, these carbon-based energy sources are finite, and they come with a cost that businesses and consumers do not bear. Such a cost, which economists call externalities, represents the side-effects of production and consumption that are not reflected in the price of the prod- uct. The externalities of carbon-based energy are CO2 emissions, which some researchers suggest are linked to air pollution and global warming,37 and ecological disasters such as the BP oil spill in the Gulf of Mexico.38

Moreover, fossil fuels are a finite, non-renewable resource. Oil prices spiked to almost $150 a barrel in the summer of 2008, pushing up gas prices in the U.S. to over $4 a gal- lon from $1.25 (inflation-adjusted) in the late 1990s. The increase in oil prices over time occurred in a roller coaster fashion as shown in Exhibit 1.7. The global trend line of oil prices, however, is pointing upwards as supplies dwindle and energy demand increases, especially in the rapidly developing countries. Higher oil prices and increasing public awareness of the externalities produced by the burning of fossil fuels have led to a search for renewable energy sources that are more ecologically friendly.

The green and clean-tech economy describes future business opportunities in renewable energy, energy conservation, efficient energy use, and energy technology.39 The goal is to develop a sustainable global economy that the earth can support indefinitely.40 Several gov- ernments across the world such as Germany, Denmark, Israel, and Spain provide incentives to induce businesses to invest in the green economy, and thus create sustainable jobs. The U.S.

0

50

100

150

200

250

300

Time

$147

2008

O il

P ri

ce s

U S

D ol

la rs

p er

B ar

re l

EXHIBIT 1.7

Conceptual Depiction of Oil Prices and Predicted Trend Source: Adapted from Shai Agassi’s presentation at TED, February 2009, www.ted.com/ talks/lang/eng/shai_agassi_ on_electric_cars.html.

externalities Side- effects of production and consumption that are not reflected in the price of a product.

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24 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 17

plans to invest $150 billion over the next decade to help jump-start a green economy. It hopes to create five mil- lion new jobs that pay well, can’t be outsourced, and reduce America’s dependence on middle-eastern oil.41 In the meantime, China is fast becoming the world’s leading producer of solar panels, having driven the prices for such panels down by almost 50 percent within just a year.42 If the size of the current energy industry is any indication, the green and clean-tech economy is likely to be a multi-trillion dollar business. This of course creates opportunities for existing com- panies such as ABB, GE Energy, Philips, and Siemens, as well as entrepreneurs, in their quest to make an eco- system of energy innovation become a reality.43

Again, a note of caution is in order: Although the green economy receives significant media attention, most green energy sources are not yet cost-competitive with old-line coal and oil. This is partly due to the fact that market prices do not include externalities. Some studies also indicate that world oil reserves will be suf- ficient for another 100 years or more.44 Moreover, the U.S. has the largest proven coal reserves worldwide (roughly 30 percent), and is most likely to use those to provide the base load for its energy consumption. Famed investor Warren Buffett shares this perspective: his Berkshire Hathaway company acquired Burlington Northern railroads for over $26 billion.45 Railroads are the most cost-effective way of transporting com- modities such as coal, steel, wheat, lumber, and con- sumer goods over long distances. Burlington Northern moves coal from where it is mined to population-rich states that receive much of their power from coal-fired plants. As in any business situation, managers must carefully consider both opportunities and threats when making strategic decisions.

WEB 2.0. In the early days of the Internet, websites more or less passively displayed infor- mation. Examples of the “old” WWW (World Wide Web) are initial versions of compa- nies’ websites that merely displayed information such as their logo, hours, phone numbers, address, and a brief overview of the company. The term Web 2.0 was coined to denote interactivity, with the goal of harnessing the collective intelligence of web users.46 The idea was that the more people participate, the better the resulting websites and in turn the better the resulting products and services. Web 2.0, therefore, relies on network effects.47 As an example, the more people use Google’s search engine, the better the search engine gets as it continuously fine-tunes its PageRank algorithm. Many companies are devising ways to utilize social networking to strengthen customer relationships and thus the basis for competi- tive advantage. Amazon, Netflix, YouTube, Facebook, Flickr, and Threadless are but a few examples of Web 2.0 applications that benefit from network effects. Strategy Highlight 1.1 shows how the online startup Threadless uses Web 2.0 technology to craft an innovative business model.

STRATEGY HIGHLIGHT 1.1

Threadless: Leveraging Crowdsourcing to Design Cool T-Shirts Threadless, a community-centered online apparel store (www.threadless.com), was founded in 2000 by Jake Nickell, then a student at the Illinois Institute of Art, and Jacob DeHart, then a student at Purdue University, with $1,000 as startup capital. After Jake had won an online T-shirt design contest, the two entrepreneurs came up with a business model to leverage user- generated con- tent. The idea is to let consumers “work for you” and thus turn consumers into prosumers, a hybrid between producers and consumers.

Members of the Threadless “community” do most of the work, which they consider fun: They submit T-shirt designs online, and community members vote on which designs they like best. The designs receiv- ing the most votes are put in production, printed, and sold online. Threadless leverages crowdsourcing, a process in which a group of people voluntarily per- form tasks that were traditionally being completed by a firm’s employees. Rather than outsourcing its work to other companies, Threadless outsources its T-shirt design to its website community. The Web 2.0 concept of leveraging a firm’s own customers to help produce better products is explicitly included in Threadless’s business model.

crowdsourcing A process in which a group of people voluntarily performs tasks that were traditionally completed by a firm’s employees.

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Strategic Management: Concepts 25

18 PART 1 | Strategy Analysis

Threadless’s business model translates real-time market research and design contests into quick sales. Threadless produces only T-shirts that were approved by its community. Moreover, it has a very good understanding of market demand because it knows the number of people who participated in each design contest. In addition, when scoring each T-shirt design in a contest, Threadless users have the option to check “I’d buy it.” These features give the Threadless community a voice in T-shirt design and also coax community mem- bers into making a pre-purchasing commitment. Threadless does not make any significant investments until the design and market size are determined, thus basically minimizing its downside. Not surprisingly, Threadless has sold every T-shirt that it has printed. Moreover, it has a cult-like following and is outperforming established companies such as Old Navy and Urban Outfitters with their more formulaic T-shirt designs.48

STAKEHOLDERS Each chapter contains a section entitled Gaining & Sustaining Competitive Advantage, in which we put one specific theory or concept under the magnifying glass to critically evalu- ate if and how it is linked to competitive advantage, the overarching goal in strategic man- agement. To accomplish this, we combine strategic management research with real-world observations. We conclude this chapter by looking at stakeholders and their relationship to competitive advantage.

Successful business strategies generate value for society. When firms or individuals com- pete in their own self-interest while obeying the law and acting ethically, they ultimately create value. In so doing, they make society better.49 Value creation lays the foundation for all the important benefits successful economies can provide: education, public safety, and health care, among others. Superior performance allows a firm to reinvest some of its prof- its to accrue more resources and thus to grow. This in turn provides more opportunities for employment and fulfilling careers. In the chapter opener, we saw that Google created tremen- dous value, and with it career opportunities. In contrast, strategic mistakes can be expensive. Conservative estimates of the ill-fated AOL TimeWarner merger suggest it destroyed about $100 billion of shareholder value and with it many employment and career opportunities.

Competitive advantage, therefore, not only is of interest to the CEO or shareholders, but also directly affects every person who has an interest in a company. These persons are stakeholders—individuals or groups who can affect or are affected by the actions of a firm.50 They have a claim or interest in the performance and continued survival of the firm. As shown in Exhibit 1.8, internal stakeholders include stockholders, employees (including executives, managers, and workers), and board members. External stakeholders include customers, suppliers, alliance partners, creditors, unions, communities, and governments at various levels (local, state, federal, and supranational in the case of the European Union). As Exhibit 1.8 indicates, all stakeholders make specific contributions to the firm, which in turn provides different types of inducements to different stakeholders. The firm, therefore, has a multifaceted exchange relationship with a number of diverse internal and external stakeholders. (Given the importance of stakeholders to firm performance, we take up this topic again in Chapter 12 when studying strategy implementation.)

Some stakeholders can exert a powerful influence on firms. In some instances, firms are able to create a competitive advantage but fail to capture it because of actions of their stakeholders.51 This sounds like a contradiction, doesn’t it? It is not. Consider this: Once a firm has created a competitive advantage, a battle can ensue over how the spoils of that competitive advantage are split among the firm’s different stakeholders.52 In the U.S. car industry, the United Auto Workers (UAW) had such a stronghold on GM, Chrysler, and Ford that some argue they were a major factor in creating a competitive disadvantage

GAINING & SUSTAINING COMPETITIVE ADVANTAGE

>> LO 1-7 Critically evaluate the role that different stakeholders play in the firm’s quest for competitive advantage.

stakeholders Individuals or groups who can affect or are affected by the actions of a firm.

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26 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 19

(although management signed the labor contracts with the unions).53 In the investment banking industry, employees are powerful stakeholders. Skilled human capital is one of the most important resources in investment banking (as in other professional services such as management consulting and law firms). As a consequence of their strong position, the combined annual bonuses of investment banks’ employees frequently exceed the bank’s net income. In 2007, the year before the financial meltdown, the net income of the big-five U.S. investment banks combined (Bear Sterns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) was a little over $10 billion, and the total of the bonuses paid to the employees was close to $40 billion.54 During 2008, the worst year in terms of stock performance since the Great Depression, the big-five investment banks lost $25 billion, but still paid bonuses that exceeded $25 billion.55 These data show that although investment banks clearly have valuable resources (namely, employees) that can create competitive advantage, those same resources are powerful stakeholders that can capture the value they create. By capturing that value, the employee stakeholders left less value for other stake- holders, such as stockholders or customers.

These examples show that although some stakeholders have a strong influence in help- ing a firm gain and sustain competitive advantage, they also capture much of the value cre- ated because these key employees realize how critical they are in creating the value in the first place. Not all stakeholder groups are created equal, and their differential power influ- ences how the economic value created is distributed among different stakeholder groups. If some stakeholders are able to extract significant value, the firm’s competitive advantage may not be realized when comparing overall firm performance to that of competitors.

g

THE AFI STRATEGY FRAMEWORK A successful strategy details a set of goal-directed actions that managers intend to take to improve or maintain overall firm performance. Building strategy is the result of three broad management tasks:

1. Analyze (A)

2. Formulate (F)

3. Implement (I)

External Stakeholders • Customers • Suppliers • Alliance Partners • Creditors • Unions • Communities • Governments

Internal Stakeholders • Employees • Stockholders • Board Members

In du

ce m

en ts

In du

ce m

en ts

Co nt

rib ut

io ns

Co nt

rib ut

io ns

EXHIBIT 1.8

Internal and External Stakeholders in an Exchange Relationship with the Firm

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Strategic Management: Concepts 27

20 PART 1 | Strategy Analysis

These are the pillars of research and knowledge about strategic management. Although we will study each task one at a time, they are highly interdependent and frequently hap- pen simultaneously. A firm cannot really formulate a strategy without thinking about how to implement it, for instance, and while implementing a strategy, managers are constantly analyzing the need to adjust to changing circumstances. We’ve captured those relationships in the AFI strategy framework, shown in Exhibit 1.9. This model links the three interde- pendent management tasks—analyze, formulate, and implement. What we want our model to do is explain and predict differences in firm performance. This information will allow managers to conceive of and implement a strategy that can improve its performance and result in competitive advantage.

In each of the three broad management tasks, managers focus on specific questions, listed next. (We address those questions in specific chapters, as indicated.)

Strategy analysis (A): ■ The strategic management process: What are our vision, mission, and values? What is

our process for “making” strategy (how does strategy come about)? (Chapter 2) ■ External analysis: What effects do forces in the external environment have on strategy

and competitive advantage? (Chapter 3)

GAINING & SUSTAINING COMPETITIVE ADVANTAGE

Implementation 11. Organizational Design: Structure, Culture, and Control 12. Corporate Governance, Business Ethics, and Strategic Leadership

Formulation: Business Srategy 6. Business Strategy: Differentiation, Cost Leadership, and Integration 7. Business Strategy: Innovation and Strategic Entrepreneurship

Analysis: Getting Started 1. What Is Strategy and Why Is It Important? 2. The Strategic Management Process

Formulation: Corporate Strategy 8. Corporate Strategy: Vertical Integration and Diversification 9. Corporate Strategy: Acquisitions, Alliances, and Networks 10. Global Strategy: Competing Around the World

External and Internal Analysis 3. External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 4. Internal Analysis: Resources, Capabilities, and Activities 5. Competitive Advantage and Firm Performance

EXHIBIT 1.9

The AFI Strategy Framework and Text Outline

AFI strategy framework A model that links three interdependent strategic management tasks—analyze, formulate, and implement—that, together, help firms conceive of and implement a strategy that can improve performance and result in competitive advantage.

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28 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 21

■ Internal analysis: What effects do our internal resources and capabilities have on strat- egy and competitive advantage? (Chapter 4)

■ Firm performance: How can we measure competitive advantage? (Chapter 5)

Strategy formulation (F ): ■ Business strategy: How should we compete? (Chapters 6 and 7) ■ Corporate strategy: Where should we compete? (Chapters 8 and 9) ■ Global strategy: Where and how should we compete around the world? (Chapter 10)

Strategy implementation (I ): ■ Organizational design: How should we organize to put the formulated strategy into

practice? (Chapter 11) ■ Corporate governance, business ethics, and strategic leadership: What type of strategic

leadership and corporate governance do we need? How do we anchor our decision in business ethics? (Chapter 12)

The AFI strategy framework shown in Exhibit 1.9 will be repeated at the beginning of each of the book’s parts, to help show where we are in our study of the firm’s quest to gain and sustain competitive advantage.

O N THE OPENING PAGE of the chapter, ChapterCase 1 provides background informa- tion about a quest for competitive advantage taking place in the Internet-search market.

Microsoft’s Bing picked up a new partner—Facebook— in its continuing journey to unseat Google from the top of the search engine business. In terms usually reserved for a hot new Silicon Valley startup, Facebook’s CEO, Mark Zuckerberg, announced the company’s surprising decision to partner with the “really scrappy . . . under- dog” Bing, rather than the incumbent Google. Zuckerberg stated, “When you’re an incumbent in an area  .  .  .  there is a tension between innovating and trying new things versus what you already have.”56 Perhaps the announcement shouldn’t have been such a surprise. After all, in 2007 Microsoft did invest $240 million, for an ownership share of less than 2 percent, in privately held Facebook.57

Microsoft and Facebook are rolling out a variety of features to make “search more social.” If, say, you are looking for a new restaurant in your area, Bing searches can include data on what your Facebook friends have “liked.” A view of Microsoft’s attempt to unseat Google

can be found from Bing direc- tor Lisa Gurry, who notes, “We think both companies [Google and Microsoft] are focused on improving performance; our approach . . . is about the speed of getting things done—not the speed of getting a high volume of results.”58

Thinking about this chapter’s opening case, answer the following questions.

1. Google was not the first search engine on the Internet, but it has been the most success- ful for a decade. What is Google’s competitive advantage?

2. LinkExchange was created in 1996 by Sanjay Madan and Tony Hsieh (more recently with Zappos) and, as noted in the case, was purchased by Microsoft in 1998. Why was Microsoft not interested in keeping the Keywords project in 2000?

3. What strategy and business model is Microsoft using today with Bing to try to succeed in the Internet-search business?

CHAPTERCASE 1 Consider This . . .

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Strategic Management: Concepts 29

22 PART 1 | Strategy Analysis

This chapter defined strategy and competitive advan- tage and set the stage for further study of strategic management, as summarized by the following learn- ing objectives and related take-away concepts.

LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. >> Competitive advantage is always judged relative

to other competitors or the industry average. >> To obtain a competitive advantage, a firm must

either create more value for customers while keeping its cost comparable to competitors, or it must provide value equivalent to competitors but at lower cost.

>> A firm able to dominate competitors for pro- longed periods of time has a sustained competi- tive advantage.

>> A firm that continuously underperforms its rivals or the industry average has a competitive disadvantage.

>> Two or more firms that perform at the same level have competitive parity.

LO 1-2 Define strategy and explain its role in a firm’s quest for competitive advantage. >> Strategy is the set of goal-directed actions a firm

intends to take in its quest to gain and sustain competitive advantage.

>> An effective strategy requires that strategic trade-offs be recognized and addressed—e.g., between value creation and the costs to create the value.

>> Managers’ strategic assumptions are an out- flow of their theory of how to compete. Successful strategy requires three integrative management tasks—analysis, formulation, and implementation.

>> When managers align their assumptions closely with competitive realities, they can create and implement successful strategies, resulting in value creation and superior firm performance.

>> When managers’ theories about how to gain and sustain competitive advantage do not reflect reality, their firm’s strategy will destroy

rather than create value, leading to inferior firm performance.

LO 1-3 Explain the role of firm effects and industry effects in determining firm performance. >> A firm’s performance is more closely related to

its managers’ actions (firm effects) than to the external circumstances surrounding it (industry effects).

>> Firm and industry effects, however, are interde- pendent and thus both are relevant in determining firm performance.

LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation. >> Corporate executives must provide answers to the

question of where to compete (in industries, mar- kets, and geographies), and how to create syner- gies among different business units.

>> General (or business) managers must answer the strategic question of how to compete in order to achieve superior performance. They must man- age and align all value-chain activities for com- petitive advantage.

>> Functional managers are responsible for imple- menting business strategy within a single functional area.

LO 1-5 Outline how business models put strategy into action. >> To put a firm’s strategy into action, a business

model must: (1) translate the firm’s strategy into competitive tactics and initiatives, and (2) imple- ment the strategy through effective structures, processes, culture, and procedures.

LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century. >> The competitive landscape of the 21st century is

characterized by ever-faster technological change in a truly global marketplace.

>> Examples of industries that seem likely to provide good future opportunities are health care, the green economy, and Web 2.0.

Take-Away Concepts

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30 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 23

LO 1-7 Critically evaluate the role that different stakeholders play in the firm’s quest for competitive advantage. >> Stakeholders are individuals or groups that have

a claim or interest in the performance and contin- ued survival of the firm; they make specific con- tributions for which they expect rewards in return.

>> Internal stakeholders include stockholders, employees (including executives, managers, and workers), and board members.

>> External stakeholders include customers, suppli- ers, alliance partners, creditors, unions, communi- ties, and governments at various levels.

>> Some stakeholders are more powerful than others, and may extract significant rewards from a firm, so much that any firm-level competitive advan- tage may be negated.

AFI strategy framework (p. 20)

Bottom of the pyramid (p. 15)

Business model (p. 11)

Competitive advantage (p. 4)

Competitive disadvantage (p. 5)

Competitive parity (p. 5)

Co-opetition (p. 6)

Crowdsourcing (p. 17)

Externalities (p. 16)

Firm effects (p. 8)

Industry effects (p. 8)

Stakeholders (p. 18)

Strategic business unit (SBU) (p. 10)

Strategic management (p. 4)

Strategy (p. 6)

Sustainable competitive advantage (p. 5)

Key Terms

1. How is a strategy different from a business model? How is it similar?

2. Threadless (in Strategy Highlight 1.1) is an exam- ple of a firm building on its customer base to use new products and also to participate in the design and vetting of popular designs. In the summer of 2010, Dell Computer announced a partnership with Threadless for designs on its laptop com- puters. For a small additional fee (and an extra day’s delay in shipping), you can get a Threadless design etched on your new Dell laptop.59 Why do you think Dell is keen on offering this ser- vice? What other firms use this crowdsourcing

technique? Where else might this type of business model show up in the future?

3. As noted in the chapter, research found that firm effects are more important than industry effects. What does this mean? Can you think of situations where this might not be true?

4. This chapter introduces three different levels appropriate for strategic considerations (see Exhibit 1.3). In what situations would some of these levels be more important than others? How should the organization ensure the proper atten- tion to each level of strategy as needed?

Discussion Questions

1. Given that traditional U.S. firms such as IBM have over 70 percent of their employees and almost two-thirds of revenues come from out- side the United States, what is an appropriate definition of a “U.S. firm”? Is there any special

consideration a firm should have for its “home country”?

2. Corporate leaders are responsible for guiding the firm’s strategies. Their goal is to help the firm gain and sustain a competitive advantage and thus

Ethical/Social Issues

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24 PART 1 | Strategy Analysis

a profit for the shareholders. What responsibil- ity do company managers have for other conse- quences of their strategies? For example, should

Walmart try to mitigate the negative impact its arrival in communities can have on small locally owned stores? Why or why not? Explain.

SMALL GROUP EXERCISE 1 The chapter argues that Microsoft and Google have quite different business models. In 2009, Microsoft revenues were $58.4 billion, an amount that was down 3 percent from 2008 levels (the first annual decline in Microsoft’s history). Google had sales of $23.6 billion—an increase of 9 percent over its 2008 levels.60

Form a group of three or four students and spend 5 to 10 minutes discussing one of the following ques- tions. (Your instructor may assign the question.)

1. Is this revenue downturn a sign that Microsoft is in trouble or just a result of the recession over the period? Should Microsoft change any of its strategies based on this information?

2. While Google increased sales, 97 percent of its revenues came from advertising. Is this a prob- lem going forward? Should it change any of its strategies?

3. Apple and IBM are two firms in the competitive landscape. Should Microsoft (Google) be more proactive in addressing these competitors?

SMALL GROUP EXERCISE 2 Corporations are starting to become more aware of blogging on the Internet. Blogging can be a factor that

can increase buyers’ ability to have either positive or negative effects on a firm.

In one well-publicized case, journalist/blogger Jeff Jarvis of www.buzzmachine.com blogged about problems with a Dell computer he purchased. His site was inundated with others who also had poor expe- riences with Dell. The “Dell hell” uproar resulted in Dell not only calling Mr. Jarvis and resolving his prob- lem but opening its own blog www.dell.com/blogs. Additionally, some time later Mr. Jarvis visited Dell’s headquarters and wrote an article for BusinessWeek entitled “Dell Learns to Listen.”61

1. Use a search engine to find large companies that include a blog on their official website. (Keywords “fortune 500 blogs” will steer you to many lists of such companies.)

2. What seems to be the primary purpose of most of the blogs you found?

3. Does the blog seem to be updated regularly?

4. Does the blog allow users to post comments or questions to the firm? If so, do any of the ques- tions get answered by the company?

Small Group Exercises

PROJECT OVERVIEW The goal of the strategy term project is to give you practical experience with the elements of strate- gic management. Each end-of-chapter assignment requires data collection and analysis relating the mate- rial discussed in the chapter to the firm you select here for study throughout the course. At the end of each chapter, we make additional stages of a strategic

analysis available. The goal of this term-long project is to give you a tangible application of many of the con- cepts discussed in the text. By the end of the project, you will not only have practice in using key strategic management components and processes to increase your understanding of the material, but you also will be able to conduct a complete strategic management analysis of any company.

Strategy Term Project

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32 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 25

MODULE 1: INITIAL FIRM SELECTION AND REVIEW In this first module, you will identify a firm to study for this project. We suggest you select one company and use it for each module in this term project. Choose a firm that you find interesting or one that is part of an industry you would like to know more about. Throughout the modules, you will be required to obtain and analyze a significant amount of data about the firm. Therefore, a key criterion is also to choose a firm that has data available for you to gather.

The primary approach to this project is to select a publicly held firm. Many large firms such as Apple, Coca-Cola, and GE have been widely reported on in the business and popular press, and a wealth of infor- mation is available on them. Other medium-sized public firms such as GameStop, Netflix, and Under Armour can be used as example firms for this project. One cautionary note: For firms that are less than three years public or in industries that are not well-defined, it will take some additional reflection to properly iden- tify such items as competitors and suppliers. But if it is a firm you are truly motivated to study, the effort can be quite rewarding.

Relevant data on all public firms can be freely obtained using web services such as Edgar (www.sec .gov/edgar.shtml). Annual reports for firms also are a treasure-trove of information. These reports and other quarterly update materials are often available from the firm’s own website (look for “about us” or “inves- tor relations” tabs, often located at the bottom of the company’s website). Additionally, most university and public libraries have access to large databases of arti- cles from many trade publications. (Factiva and ABI/ Proquest are two examples.) Company profiles of a

variety of publicly listed firms are available at reliable websites such as Hoovers.com and finance.yahoo.com. Also, many industries have quite active trade associa- tions that will have websites and publications that can also be useful in this process. Your local librarian can likely provide you some additional resources that may be licensed for library use or otherwise not available online. Examples of these are Value Line Ratings & Reports and Datamonitor.

A second approach to this project is to select a smaller firm in your area. These firms may have cover- age in the local press. However, if the firm is not public, you will need to ensure you have access to a wide vari- ety of data from the firm. If this is a firm for which you have worked or where you know people, please check ahead of time to be sure the firm is willing to share its information with you. This approach can work well, especially if the firm is interested in a detailed analysis of its strategic position. But to be successful with this project, be sure you will have access to a broad range of data and information (perhaps including interviews of key managers at the firm).

If you are in doubt on how to select a firm, check with your instructor before proceeding. In some instances, your instructor will assign firms to the study groups.

For this module, answer the following questions:

1. Provide a brief history of the company.

2. List the top management of the firm and note what experience and leadership skills they bring to the firm. If a larger conglomerate, list both cor- porate and business managers.

3. What is the principal business model of the firm? (How does the firm make most of its profits?)

myStrategy HOW TO POSITION YOURSELF FOR CAREER ADVANTAGE

A s the chapter discussed, firm-level d ecisions have a significant impact on the success or failure of organizations. Industry-level effects, however, can

also play a role. Many considerations go into deciding what career choices you make during your working life. The chap- ter notes that some sectors (such as health care, the green economy, and Web 2.0) are expected to grow faster than others.

At the top of the next page is a sample of revenue growth rates in various industries for a recent five-year period.

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Strategic Management: Concepts 33

26 PART 1 | Strategy Analysis

Industry Name Change in Sales

Power 54.51%

Petroleum (production) 44.64%

Pharmacy services 43.68%

Insurance (property/casualty) 37.60%

Advertising 35.99%

Biotechnology 35.06%

Pharmaceuticals 24.88%

Natural gas (diversified) 24.54%

E-commerce 20.32%

Securities brokerage 16.20%

Telecommunication services 16.05%

Entertainment technology 15.99%

Computer software/services 15.26%

Internet 13.71%

Chemical (diversified) 13.52%

Endnotes 1. This ChapterCase is based on the following sources: “Yahoo to buy Overture for $1.63 billion,” CNET News, July 14, 2003; “Microsoft bid to beat Google builds on a history of misses,” The Wall Street Journal, January 16, 2009; “Yahoo tie-up is lat- est sign tide turning for Microsoft’s Ballmer,” The Wall Street Journal, July 30, 2009; “Bingoo! A deal between Microsoft and Yahoo!” The Economist, July 30, 2009; and “Google, Microsoft spar on antitrust,” The Wall Street Journal, March 1, 2010.

2. For an in-depth discussion, see Lewis, M. (2003), Moneyball: The Art of Winning an Unfair Game (New York: Norton).

3. Porter, M. E. (1980), Competitive Strategy: Techniques for Analyzing Competitors (New York: The Free Press).

4. Top 15 Global Products (2009), IMS Health, www.imshealth.com.

5. Ibid.

6. This section draws on: Porter, M. E. (1996), “What is strategy?” Harvard Business Review, November–December: 61–78; and Porter, M. E. (1980), Competitive Strategy.

7. Dyer, J. H., and H. Singh (1998), “The relational view: Cooperative strategy and sources of interorganizational competitive advantage,” Academy of Management Review 23: 660–679; and Rothaermel, F. T., and A. Hess (2010), “Innovation strat- egies combined,” MIT Sloan Management Review, Spring: 12–15.

8. Brandenburger, A. M., and B. J. Nalebuff (1996), Co-opetition (New York: Currency Doubleday); and Gnyawali, D., J. He, and R. Madhavan, (2006), “Impact of co-opetition on firm competitive behavior: An empirical examination,” Journal of Management 32: 507–530.

9. Christensen, C. M., and M. E. Raynor (2003), “Why hard-nosed executives should care about management theory,” Harvard Business Review, September: 1–10.

10. Drucker, P. (1994), “The theory of business,” Harvard Business Review, September–October: 95–105.

11. Duke, M. T. (2010), presentation at the Georgia Institute of Technology, April 1, 2010.

12. For more details, see Rothaermel, Frank T., with V. P. Singh (2013), “Tesla Motors and U.S. Auto Industry,” case study, in Rothaermel, F. T., Strategic Management (Burr Ridge, IL: McGraw-Hill).

13. “Ford touts its small-car resur- gence,” The Wall Street Journal, January 11, 2010; and “Epiphany in Dearborn. How Ford turned a crash into a profit— without a government bail-out,” The Economist, December 9, 2010.

14. Hansen, G. S., and B. Wernerfelt (1989), “Determinants of firm per- formance: The relative importance of economic and organizational factors,” Strategic Management Journal 10: 399–411; and McGahan, A. M., and M. E. Porter (1997), “How much does

Industry Name Change in Sales

Medical supplies 12.87%

Total market average 12.79%

Apparel 0.50%

Retail stores 0.49%

Banking 0.00%

Semiconductor equipment –16.66%

Homebuilding –30.52%

Public/private equity –32.41%

Insurance (life) –71.81%

1. If you are about to embark on a new career, what effect should the likelihood of industry growth play in your decision?

2. Why could growth rates be an important consideration? Why not?

Sample Five-Year Growth Rates (2005–2009)62

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34 Managing Stratregy in The Global Marketplace

CHAPTER 1 | What Is Strategy and Why Is It Important? 27

32. Prahalad, C. K., and S. Hart (2002), “The future at the bottom of the pyramid,” Strategy+Business 26: 54–67; Prahalad, C. K. (2004), The Future at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School Publishing); and Hart, S. (2005), Capitalism at the Crossroads (Upper Saddle River, NJ: Wharton School Publishing).

33. “The new people’s car,” The Economist, March 26, 2009.

34. For an in-depth discussion of future industries and its strategic as well as career implications, see: Reich, R. (2000), The Future of Success. Working and Living in the New Economy (New York: Knopf); Canton, J. (2006), The Extreme Future. The Top Trends that Will Reshape the World in the Next 20 Years (New York: Penguin); and Shuen, A. (2008), Web 2.0: A Strategy Guide (Sebastopol, CA: O’Reilly Media).

35. “Health-care providers pledge to try to curb costs,” The Wall Street Journal, May 11, 2009.

36. “GE launches ‘healthymagination’; Will commit $6 billion to enable better health focusing on cost, access and qual- ity,” GE Press Release, May 7, 2009. See also: www.healthymagination.com.

37. See data compiled by NASA’s Goddard Institute for Space Studies and reports by the Intergovernmental Panel on Climate Change (IPCC).

38. “BP hit by doubts over ability to pay for costs of oil spill,” The Wall Street Journal, June 9, 2010.

39. King, A., and M. Lenox (2002), “Does it really pay to be green?” Journal of Industrial Ecology 5: 105–117.

40. Hart, S. (1997), “Beyond green- ing: Strategies for a sustainable world,” Harvard Business Review, January–February.

41. “The change we need,” The Wall Street Journal, November 3, 2008.

42. “China races ahead of U.S. in drive to go solar,” The New York Times, August 25, 2009.

43. Esty, D. C., and A. S. Winston (2006), Green to Gold; and Friedman, T. (2008), Hot, Flat, and Crowded.

44. “Another century of oil? Getting more from current reserves,” Scientific American, October 2009.

York: Farrar, Straus and Giroux); Esty, D. C., and A. S. Winston (2006), Green to Gold. How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (Hoboken, NJ: Wiley); and Friedman, T. (2008), Hot, Flat, and Crowded: Why We Need a Green Revolution—and How It Can Renew America (New York: Farrar, Straus, and Giroux).

23. Prensky, M. (2001), “Digital natives, digital immigrants.” From On the Horizon, Vol. 9, No. 5, October, MCB University Press.

24. Ibid. 25. Friedman, T. L. (2005), The World Is Flat.

26. Cairncross, F. (1997), The Death of Distance: How the Communications Revolution Will Change Our Lives (London, U.K.: Orion Business Books); and Kotha, S., V. Rindova, and F. T. Rothaermel (2001), “Assets and actions: Firm-specific factors in the internation- alization of U.S. internet firms,” Journal of International Business Studies 32: 769–791.

27. The 27 EU member states are Austria, Belgium, Bulgaria, Czech Republic, Cypus, Denmark, Estonia, Finland, France, Germany, Greece, Italy, Ireland, Latvia, Lithuania, Luxembourg, Hungary, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. (Source: www.europa.eu.)

28. The Eurozone countries are Austria, Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The euro is used by five other European countries that are not part of the Eurozone. In total, some 327 million Europeans are using the euro. Another 175 million people world- wide use currencies that are pegged to the euro, making it the second largest reserve currency in the world after the U.S. dollar. (Source: www.europa.eu.)

29. IBM annual reports. Various years. 30. “IBM to cut U.S. jobs, expand in India,” The Wall Street Journal, March 26, 2009.

31. Peng, M. (2009), Global Strategy, 2nd ed. (Mason, OH: South-Western Cengage).

industry matter, really?” Strategic Management Journal 18: 15–30.

15. The remaining 35–50 percent of variance in a firm’s profitability is due to corporate-parent effects, year effects, and unexplained variation. This inter- esting debate unfolds in the following articles, among others: Rumelt, R. P. (1991), “How much does industry mat- ter?” Strategic Management Journal 12: 167–185; and McGahan, A. M., and M. E. Porter (1997), “How much does industry matter, really?” Strategic Management Journal 18: 15–30.

16. See recent J.D. Power’s quality reports, for example, as presented in “Ford touts its small-car resurgence,” The Wall Street Journal, January 11, 2010.

17. This discussion is based on Porter, M. E. (1996), “What is strategy?” Harvard Business Review, November–December: 61–78.

18. This example is drawn from O’Reilly, C. A., B. Harreld, and M. Tushman (2009), “Organizational ambidexterity: IBM and emerging business opportuni- ties,” California Management Review 51: 75–99.

19. This is a play on the acronym IBM, which stands for International Business Machines.

20. This discussion is based on Anderson, C. (2009), Free: The Future of a Radical Price (New York: Hyperion).

21. Chen, M. J. (1996), “Competitor analysis and interfirm rivalry: Toward a theoretical integration,” Academy of Management Review 21: 100–134; Gimeno, J. (1999), “Reciprocal threats in multimarket rivalry: Staking out ‘spheres of influence’ in the U.S. airline indus- try,” Strategic Management Journal 20: 101–128; and Gimeno, J., and C. Y. Woo (1999), “Multimarket competition, econ- omies of scale, and firm performance,” Academy of Management Journal 42: 239–259.

22. Drucker, P. (1992), The Age of Discontinuity: Guidelines to Our Changing Society (New York: Transaction Publishers); D’Aveni, R. (1994), Hypercompetition. Managing the Dynamics of Strategic Maneuvering (New York: The Free Press); Friedman, T. L. (2005), The World Is Flat. A Brief History of the Twenty-first Century (New

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28 PART 1 | Strategy Analysis

approach,” working paper, UCLA Anderson School of Management.

54. “On street, new reality on pay sets in,” The Wall Street Journal, January 31, 2009.

55. “Goldman Sachs staff set for bum- per bonuses as bank earns $38 million per day,” The Guardian, July 31, 2009.

56. Carr, A., “Facebook friends an ‘underdog,’ Microsoft,” Fast Company, October 13, 2010.

57. “Bing upgrades draw upon Facebook, other partners,” Associated Press, San Francisco, December 15, 2010.

58. Carr, A., “‘Underdog’ Bing talks Facebook partnership, Google rivalry,” Fast Company, December 17, 2010.

59. Saadi, S., “Crowdsourcer Threadless’ life beyond T-shirts,” Bloomberg BusinessWeek, September 16, 2010.

60. Data compiled from company annual reports 2009.

61. Jeff, J. (2009), What Would Google Do? (New York: Collins Business); and “Dell learns to listen: The computer maker takes to the blogosphere to repair its tarnished image,” BusinessWeek, October 29, 2007.

62. Compiled from Value Line Data by Dr. A. Damodaran, NYU, http://pages .stern.nyu.edu/~adamodar/.

Crowds. Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations (New York: Doubleday). 49. Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed. (published 1904) (London: Methuen and Co.). 50. Freeman, E. R. (1984), Strategic Management: A Stakeholder Approach (Boston, MA: Pitman); Freeman, E. R., and J. McVea (2001), “A stakeholder approach to strategic management,” in Hitt, M. A., E. R. Freeman, and J. S. Harrison (eds.), The Handbook of Strategic Management (Oxford, U.K.: Blackwell), pp. 189–207; and Phillips, R. (2003), Stakeholder Theory and Organizational Ethics (San Francisco, CA: Berrett-Koehler). 51. Coff, R. (1999), “When competitive advantage doesn’t lead to performance: Resource-based theory and stakeholder bargaining power,” Organization Science 10: 119–133. 52. Freeman, E. R. (1984), Strategic Management; and Phillips, R. (2003). Stakeholder Theory and Organizational Ethics. 53. Lieberman, M., and R. Dhawan (2005), “Assessing the resource base of Japanese and U.S. auto producers: A stochastic frontier production function

45. “Buffett bets big on railroads,” The Wall Street Journal, November 4, 2009.

46. Shuen, A. (2008), Web 2.0.

47. For an in-depth discussion on network effects see: Arthur, W. B. (1989), “Competing technologies, increasing returns, and lock-in by his- torical events,” Economic Journal 99: 116–131; Arthur, W. B. (1990), “Positive feedbacks in the economy,” Scientific American 262: 92–99; Arthur, W. B. (1996), “Increasing returns and the new world of business,” Harvard Business Review: 100–109; and Shuen, A. (2008), Web 2.0.

48. This Strategy Highlight is based on: Rothaermel, F. T., and S. Sugiyama (2001), “Virtual Internet communities and commercial success: Individual and community-level theory grounded in the atypical case of TimeZone.com,” Journal of Management 27: 297–312; Hippel, E. von (2005), Democratizing Innovation (Cambridge, MA: MIT Press); Howe, J. (2008), Crowdsourcing. Why the Power of the Crowd Is Driving the Future of Business (New York: Crown); Ogawa, S., and F. T. Piller (2006), “Collective Customer Commitment: Reducing the risks of new product development,” MIT Sloan Management Review 47 (Winter): 65–72; Shuen, A. (2008), Web 2.0; and Surowiecki, J. (2004), The Wisdom of

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36 Managing Stratregy in The Global Marketplace

LO 2-1 Explain the role of vision, mission, and values in the strategic management process.

LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals.

LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications.

LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage.

LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success.

LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications.

LEARNING OBJECTIVES After studying this chapter, you should be able to:

2C H A P T E R

The Strategic Management Process

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38 Managing Stratregy in The Global Marketplace

31

After reading the chapter, you will find more about this case, with related questions, on page 47.

CHAPTERCASE 2

Teach For America: Inspiring Future Leaders

T EACH FOR AMERICA is a nonprofit orga- nization that recruits college graduates and professionals to teach for two years in socially and eco- nomically disadvan-

taged communities in the United States. The idea behind Teach For America was developed by then 21-year-old Wendy Kopp as her senior thesis at Princeton. Kopp was convinced young people today are searching for meaning in their lives by making a positive contribution to society.

The genius of Kopp’s idea was to turn on its head the social perception of teaching—to make

what appeared to be an unattractive, low-status job into a high-prestige professional opportunity. Kopp established a mission for the organization she had in mind: to eliminate educational inequal- ity by enlisting our nation’s most promising future leaders in the effort. Her underlying assumption was that significant numbers of young people have a desire to take on meaningful responsibility in order to have a positive impact on the lives of

others. To be chosen for TFA is a badge of honor. In 2010, TFA received some 46,000 appli- cations for only about 4,500 positions across the country (paying the same as all other first-year teachers, ranging from $30,000 to $51,500 a year). This translates to a mere 12 percent acceptance rate, comparable to being accepted to study at Harvard (a little

less than 10 percent), Stanford (12 percent), or MIT (14 percent).1

▲ PERSUADING  highly qualified teachers to take up jobs in inner-city Detroit or Los Angeles and some rural areas in West Virginia or the Mississippi Delta region has been an elusive goal for many decades. How did an undergraduate student accomplish what the Department of Education, state and local school boards, and the national Parent- Teacher Association could not accomplish, despite trying for decades and spending bil- lions of dollars in the process? First, Kopp established a clear mission that appealed to a large number of young people. Second, she made the hiring process highly selective and turned down many who might easily qualify for teaching jobs. Making TFA highly selective changed the social perception of teaching in underprivileged areas. Suddenly, it was an honor (and great résumé builder) to be chosen for TFA. In Chapter 2, we move from thinking about why strategy is important to considerations of how firms and other organizations define their vision, mission, and values and then translate them into strate- gic intent and plans.

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32 PART 1 | Strategy Analysis

VISION, MISSION, AND VALUES In this chapter, we study the strategic management process, which describes the method by which managers conceive of and implement a strategy that can lead to a sustainable competitive advantage. The strategic management process follows the analyze-formulate- implement (AFI) strategy framework introduced in Chapter 1.

Discovering a firm’s vision and mission and defining its values are the first steps in the strategic management process. For new organizations, like TFA, the founders usually begin with a driving vision that they must further shape into statements about what they want to accomplish and how they will do so. For existing firms, this step is about fine-tuning their vision and mission as well as reaffirming their values. To begin the strategic management process, managers ask the following questions:

■ What do we want to accomplish ultimately? What is our vision? ■ What are we about? What is our mission? ■ How do we accomplish our goals? What are our values?

To answer questions about vision, mission, and values, managers need to begin with the end in mind. Think of building a house. The future owner must communicate her vision to the architect, who draws up a blueprint of the home. The process is iterated a couple of times until all the homeowner’s ideas have been translated into the blueprint. Only then does the build- ing of the house begin. The same holds for strategic success. Thus, success is created twice: first by creating, through strategic analysis, a clear mental model of what the firm wants to accomplish, and second by formulating and implementing a strategy that makes this vision a reality. An effectively communicated strategy should guide everyone in the organization.

Visionary Organizations A vision is a statement about what an organization ultimately wants to accomplish. It captures the company’s aspiration. An effective vision pervades the organization with a sense of winning and motivates employees at all levels to aim for the target, while leaving room for individual and team contributions. Employees in visionary companies tend to feel like part of something bigger than themselves. An inspiring vision helps employees find meaning in their work. Monetary rewards form only one part of what motivates people. An effective vision allows employees to reap intrinsic rewards by making the world a better place through their work activities.2 This in turn is highly motivating for employees, lead- ing to higher organizational performance.3 Basing actions on its vision, a firm will build the necessary resources and capabilities through continuous organizational learning, including learning from failure, to translate into reality what begins as a “stretch goal.”

Vision statements should be forward-looking and inspiring to provide meaning for employees when pursuing the organization’s ultimate goals. Take Teach For America (TFA), whose vision is that “one day, all children in this nation will have the opportunity to attain an excellent education.” It effectively and clearly communicates what TFA ulti- mately wants to accomplish; it provides an inspiring target to aim for. Exhibit 2.1 contains TFA’s vision, mission, and values.

It’s not surprising that vision statements can be inspiring and motivating in the not- for-profit sector. Many people would find meaning in wanting to help children attain an excellent education (TFA) or wanting to be “always there,” touching the lives of people in need (American Red Cross). But what about for-profit firms? The main difference is the metric by which we assess successful performance. TFA measures its organizational success by the effects its teachers have on student performance. In the for-profit sector,

>> LO 2-1 Explain the role of vision, mission, and values in the strategic management process.

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40 Managing Stratregy in The Global Marketplace

CHAPTER 2 | The Strategic Management Process 33

companies typically measure financial performance. Chapter 5 explores the various per- spectives by which to measure performance and capture the multifaceted nature of com- petitive advantage.

Forming Strategic Intent Strategic intent is the staking out of a desired leadership position in the long term that far exceeds a company’s current resources and capabilities.4 Challenging goals that stretch an individual or an organization can lead to higher performance.5 Many Japanese competi- tors set ambitious stretch goals of global leadership (reflected in their missions) and made them a reality: Canon “beat Xerox,” Komatsu “encircled Caterpillar,” and Honda became “a second Ford.” (Today the latter may not sound like a desirable goal, but it was in the 1970s when Honda began its quest for global leadership.) Currently, Chinese companies such as Baidu, BYD, and Lenovo aspire to world leadership. These companies set their ambitious goals when they were only a fraction the size of the companies they were chasing. Indeed, they were so small that initially the market leaders did not even recognize them as potential competitors; many had never competed outside their domestic markets. Yet all made global leadership their mission, with goals so ambitious they exceeded the firms’ existing resources and capabilities by a large margin. Effective use of stretch goals created at all levels of the organization an obsession with winning that has been sustained over several decades.6

Strategic intent allows managers to operationalize their vision because it is not only forward-looking and future-oriented but also helps in identifying steps that need to be taken to make a vision become reality. Creating and executing strategy to achieve a strategic fit with today’s environment is like driving a car while looking only in the rearview mirror. The focus should be how to create competitive advantage tomorrow. In fact, rather than

>> LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals.

EXHIBIT 2.1

Teach For America: Vision, Mission, and Values

Vision One day, all children in this nation will have the opportunity to attain an excellent education.

Mission Eliminate educational inequality by enlisting our nation’s most promising future leaders in the effort.

Values Relentless Pursuit of Results: We assume personal responsibility for achieving ambitious, measurable results in pursuit of our vision. We persevere in the face of challenges, seek resources to ensure the best outcomes, and work toward our goals with a sense of purpose and urgency.

Sense of Possibility: We approach our work with optimism, think boldly, and greet new ideas openly.

Disciplined Thought: We think critically and strategically in search of the best answers and approaches, reflect on past experiences and data to draw lessons for the future, and make choices that are deeply rooted in our mission.

Respect and Humility: We value all who are engaged in this challenging work. We keep in mind the limitations of our own experiences and actively seek out diverse perspectives.

Integrity: We ensure alignment between our actions and our beliefs, engage in honest self-scrutiny, and do what is right for the broader good.

Source: www.teachforamerica.org

strategic management process Method by which managers conceive of and implement a strategy that can lead to a sustainable competitive advantage.

vision A statement about what an organization ultimately wants to accomplish; it captures the company’s aspiration.

strategic intent The staking out of a desired leadership position that far exceeds a company’s current resources and capabilities.

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34 PART 1 | Strategy Analysis

attempting a strategic fit between a firm’s resources and capabilities and today’s external industry environ- ment, strategic intent creates an extreme misfit by set- ting ambitious goals and then challenging managers and employees across all organizational levels to close the gap by building the resources and capabilities nec- essary to accomplish these goals. It does matter where you are today, but more importantly, it matters where you want to go tomorrow. Strategy Highlight 2.1 illustrates the powerful effects that strategic intent can have. It also demonstrates, however, what can happen when a firm accomplishes its strategic intent but then fails to set new stretch goals.

Mission Statements Building on the vision, organizations establish a mission, which describes what an organization actually does—the products and services it plans to provide and the markets in which it will compete. Effective mission statements work through metaphors that help employees make appropriate decisions when faced with day-to-day situations, which sometimes can be novel or stressful.

Let’s look at Disney’s mission, which is to make people happy.8 Disney’s translation of this mission to employees who work at a Disney theme park is that they are not mere employees, they are cast members. Similarly, visitors to the park are not customers, they are audience members, there to enjoy a show. This metaphor has important implications for employees’ behavior, beginning before they are even hired. Rather than interviewing for a job, for instance, they audition for a role, like cast members in a play. Thus any time a Disney park employee is in uniform, he or she is actually “on stage,” delivering a performance. Even street sweepers (often college students on break) are part of the cast. Because they have the closest con- tact with guests, they are trained in great detail and are evaluated not only on personal neatness and job performance, but also on their knowledge about rides, parades, and restaurant and restroom locations. Like cast members in the theater, Disney employees pull off daily “the show must go on” performances that allow them to fulfill Disney’s mission to make people happy.

CUSTOMER-ORIENTED MISSIONS. Disney’s mission is aimed at its customers. A customer-oriented mis- sion defines a business in terms of providing solutions to customer needs. Companies that have customer- oriented missions (“We are in the business of providing

STRATEGY HIGHLIGHT 2.1

Winning Through Strategic Intent In the aftermath of World War II, an obscure Japanese technology startup firm named Tokyo Tsushin Kogyo K.K. began its life by repairing shortwave radios and inventing an electric rice cooker. Its lead scientist, Masaru Ibuka, thought a portable radio based on tran- sistors might be possible. He conferred with scientists from Bell Labs, the U.S. firm that invented the transis- tor. They told him a transistor radio was not techno- logically feasible. Undeterred, Ibuka asked Japan’s Ministry of International Trade and Industry (MITI) to obtain a license for the transistor from Bell Labs so he could build the portable radio. MITI turned him down, believing the fledgling firm could not commercialize such cutting-edge technology given its lack of track record and resources.

Ibuka persisted, however. Finally, in 1953 he secured permission to license the transistor. He then created an explicit strategic intent for his firm, focus- ing on being first to market with an innovative portable transistor radio of the highest possible quality.

Ibuka faced long odds: Radios then were enclosed in large pieces of decorative furniture; at that time, “Made in Japan” was synonymous with poor quality; and by the mid-1950s, Bell Labs scientists had already won two Nobel Prizes for physics. The idea that a Japanese startup working out of makeshift quarters in Tokyo could beat Bell Labs in commercializing the transistor radio seemed preposterous. But Ibuka inspired his hungry engineers to pursue their strategic intent. In 1957, they introduced the world’s first pocket transistor radio, the TR-55. It sold 1.5 million units and catapulted the firm to leadership in consumer elec- tronics. In 1958, the company changed its Japanese name to Sony Corporation.

Over time, Sony continually honed its core compe- tency in miniaturization, which allowed it to create the Walkman, Discman, and MP3 players. More recently, though, Sony has fallen on hard times. Blamed on a silo mentality, it was not able to capitalize on its MP3 player or its electronic readers and has lost market share to Apple.7

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solutions to professional communication needs”) tend to be more flexible when adapting to changing environments. In contrast, companies that have product-oriented missions (“We are in the typewriter business”) tend to be less flexible and thus more likely to fail. Companies with customer-oriented missions are more likely to maintain strategic flexibility over time.

It is important not to confuse customer-oriented missions with listening to your cus- tomer. They are not the same thing! Customer-oriented missions identify a critical need but leave open the means of how to meet this need. It is critical not to define how a customer need will be met—because the future is unknowable, and innovation might provide new ways to meet needs that we have not thought of today. Even if customer needs are constant, the organization’s mission should be flexible because the means of meeting those needs can change over time.

Think about the customer need for personal mobility. About 100 years ago, this need was met by horse-drawn buggies, horseback riding, or by trains for long distances. But Henry Ford had a different idea; he is famous for saying, “If I had listened to my customers, I would have built a better horse and buggy.”9 In contrast, Henry Ford’s original mission was to make the automobile accessible to every American. He succeeded, and the automo- bile changed how mobility was achieved. Fast-forward to today: Ford Motor Company’s mission is to provide personal mobility for people around the world. It does not even men- tion the automobile. Clearly, Ford is focusing on the consumer need for personal mobility while leaving open the door for how exactly it will fulfill this need. Today, it’s with tradi- tional cars and trucks propelled by gas-powered internal combustion engines, with some hybrid electric vehicles in its lineup. In the near future, however, Ford is likely to provide vehicles powered by alternative energy sources like electric power or hydrogen, among other new energy sources. In the far-reaching future, perhaps Ford will even get into the business of individual flying devices. If so, its mission would still be relevant and compel its managers to engage in this future market; a product-oriented mission would not allow for such a degree of strategic flexibility.

PRODUCT-ORIENTED MISSIONS. Product-oriented missions define a business in terms of a good or service provided rather than in terms of the customer need to be met. As noted, customer-oriented missions provide greater strategic flexibility than product-oriented mis- sions. The strategic decisions of U.S. railroad companies show the potential shortcomings of defining a business based on a product-oriented mission. Railroads are in the business of moving goods and people from point A to point B by rail. When they started, their short- distance competition was the horse or horse-drawn carriage; there was little long-distance competition (such as ship canals and good roads) to cover the U.S. from coast to coast. Not surprisingly, the early U.S. railroad companies saw their mission as being in the railroad business, clearly a product-based definition. Due to their monopoly, especially in long- distance travel, they initially made big money. Indeed, many early fortunes were made in the railroad business. Leland Stanford, who made his fortune as president of the Central and Southern Pacific Companies, later founded and endowed Stanford University with a gift that equals approximately $500 million today (about half his total wealth).

The railroad companies’ monopoly did not last. Technological innovations changed the transportation business dramatically. After the introduction of the automobile and the com- mercial jet, consumers had a wider range of choices, such as trucks and airplanes, to meet their long-distance transportation needs. Rail companies were slow to respond, however, and did not re-define their business in terms of services provided to the consumer. Had they seen themselves as serving the full range of transportation needs of people across America (a customer-oriented mission), they might have become successful forerunners of modern logistics companies like FedEx or UPS. Recently, the railroad companies seem to

mission Description of what an organization actually does—what its business is—and why it does it; can be customer-oriented or product-oriented.

>> LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications.

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36 PART 1 | Strategy Analysis

be learning some lessons: CSX Railroad is now re-defining itself as a green-transportation alternative with an ad campaign claiming it can move one ton of freight 423 miles on one gallon of fuel. Yet, its mission remains product-oriented: to be the safest, most progressive North American railroad.

Although a product-centric view can potentially limit a company’s strategic options, it can also help a company to refocus. Shell Canada provides an example of how deal- ing with the question, “What are we about?” led to a refocusing of the company and as a consequence, superior performance.10 Although the majority owner was Royal Dutch Shell, Shell Canada was more or less independent; its shares were traded on the Toronto Stock Exchange. In the 1980s, Shell Canada was a widely diversified business with interests not only in oil and gas exploration and distribution, but also in activities rang- ing from chemicals to forestry. Although it had performance comparable to the industry average, Shell Canada’s executives began to focus on the firm’s mission during this time. After some soul searching, the company’s managers realized that Shell Canada was at its heart a low-cost producer of oil and gas. With this new clarity of mission, Shell Canada began to sell off its peripheral businesses to refocus on oil and gas. In 2007, Royal Dutch Shell bought, at a cost of $8.7 billion, the remaining 22 percent of shares that it didn’t already own. By refocusing on oil and gas, Shell Canada was able to apply its core competency to increase the value created for customers, and to do this at a low cost. Its mission statement helped Shell Canada focus on the activities that yielded the greatest returns.

MISSION STATEMENTS AND COMPETITIVE ADVANTAGE. So, we must ask, do mis- sion statements help firms gain and sustain competitive advantage? The results are mixed: Having a clearly defined mission helps in some cases, actually hurts in others, and some- times has no effect on performance, as the following examples demonstrate. (Note that although visions and missions are not entirely synonymous as discussed earlier, many man- agers use the terms interchangeably.)

Positive Association Between Mission Statements and Competitive Advantage. Research ers have found that visionary companies—those whose stated missions clearly capture the com- pany’s aspirations—such as 3M, Hewlett-Packard (HP), Merck, Nordstrom, and Procter & Gamble (P&G)—financially outperformed their peers by a wide margin.11 An investment of $1 in the general stock market fund in 1926 (equivalent to the Dow Jones Industrial Index today) by 1990 would have grown to $415. Yet, an investment of $1 in a hypothetical stock fund composed of companies researchers identified as visionary would have grown over the same time period to $6,356. This implies visionary companies outperformed average com- panies by more than 1,400 percent. For visionary companies, superior financial performance is a byproduct of living up to their missions. Merck’s mission, for example, is to preserve and improve human life.12 The words of founder George W. Merck still form the basis of Merck’s corporate philosophy today: “We try to never forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”13

Negative Association Between Mission Statements and Competitive Advantage. Sometimes a firm’s mission statement can hurt its financial performance. Better World Books (BWB), for example, is an online bookstore that focuses on economic, social, and environmental goals. (As we will discuss in Chapter 5, the combination of economic, social, and environmental con- cerns that can lead to a sustainable strategy is called the triple-bottom line.) BWB’s stated mis- sion is to collect and sell books online to fund literacy initiatives worldwide.14 Initially, BWB’s founders—recent graduates from Notre Dame University—decided to donate 50 percent of

GAINING & SUSTAINING COMPETITIVE ADVANTAGE

>> LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage.

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the firm’s revenues to various non- governmental organizations (NGOs) that promote literacy. After a while, the founders realized that the way they operationalized their mission was threatening the future viability of the venture. They decided they had to reduce their donation commitment from 50 percent of revenues to between 7 and 10 percent. BWB provides an example in which a firm’s mission and competitive advantage can be negatively associated, especially when competitive advantage is understood more narrowly as superior financial performance. (We will explore more about the triple-bottom line concept and competitive advantage in Chapter 5.)

No Association Between Mission State ments and Competitive Advantage. In some cases, mission statements have little or no effect on performance and competitive advantage. Intel Corporation, one of the world’s leading silicon innovators, provides an illustrative case. Intel’s early mission was to be the pre-eminent building-block supplier of the PC industry. Intel designed the first commercial microprocessor chip in 1971 and set the standard for microprocessors in 1978; during the personal computer (PC) revolution in the 1980s, microprocessors became Intel’s main line of business. Intel’s customers were OEMs (original equipment manufacturers) that produce consumer end-products, such as computer manufacturers HP, IBM, Dell, and Compaq.

In the Internet age, however, the standalone PC as the end-product has become less important. Customers now want to stream video and share photos online. Such activi- ties consume a tremendous amount of computing power. To reflect this shift, Intel in 1999 changed its mission to focus on being the preeminent building-block supplier to the Internet economy. Later, in 2008, Intel fully made the shift to a customer-oriented mission: Its current mission statement is to delight our customers, employees, and share- holders by relentlessly delivering the platform and technology advancements that become essential to the way we work and live. Part of this shift can be explained by a hugely successful “Intel Inside” advertising campaign in the 1990s that made Intel a household name worldwide.

Intel accomplished superior firm performance over decades through continuous adap- tation to changing market realities. Yet its formal mission statement lagged the firm’s transformations. Intel regularly changed its mission statement after it had accomplished successful transformation.15 In such a case, mission statements and firm performance are clearly not related to one another.

Taken together, what empirical research shows is that sometimes mission statements and firm performance are associated with one another. What is less clear, however, is whether these relationships are causal—whether an effective mission statement leads to competitive advantage. The upshot is that an effective mission statement can lay the foun- dation upon which to craft a strategy that creates economic value, leading to competitive advantage. (You will learn more about economic value creation in Chapter 5, when study- ing competitive advantage in more depth.)

To be effective, firms do need to back up their mission statements with strategic commit- ments, actions that are costly, long-term oriented, and difficult to reverse. Boeing’s decision to develop the 787 Dreamliner, for example, is a multibillion-dollar, multidecade strate- gic commitment.16 Without such commitments, the firm’s mission statement is just words. Eventually, both employees and external stakeholders may perceive the hollowness of the mis- sion statement and realize that, however good the statement, it will not result in competitive

strategic commitments Actions that are costly, long-term oriented, and difficult to reverse.

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38 PART 1 | Strategy Analysis

advantage without strategic actions to back it up. Moreover, if the vision-mission-values are not in coherence with each other, then a firm’s strategy will necessarily be compromised. Effective alignment is key when translating a mission statement into strategic actions.

Living the Values Organizational values are the ethical standards and norms that govern the behavior of individuals within a firm or organization (and within society). Strong ethical values, in turn, have two important functions: First, they form a solid foundation on which a firm can build its mission and long-term success. They also are the guardrails put in place so the company can stay on track when pursuing its mission in its quest for competitive advantage.

Employees tend to follow values practiced by strategic leaders. Without commitment and involvement from top managers, any statement of values remains a meaningless public relations exercise. Employees find out very quickly by observing executives’ day-to-day decisions whether they are guided by an unchangeable and ethical core that is reflected in the company’s mission, or whether they merely pay lip service to its values. True values must be lived with integrity, especially by the top management team. Unethical behavior by top managers is like a virus that spreads quickly throughout the entire organization.

The values espoused by a company provide answers to the question, How do we accom- plish our goals? They help individuals make choices that are both ethical and effective in advancing the company’s goals. For instance, John Hammergren, Chairman and CEO of McKesson, a $110 billion health care company, sees a direct relationship between the company’s performance and its values: “At McKesson, we are guided by a common set of values: integrity, customer-first, accountability, respect, and excellence. We call them our ICARE Shared Principles, and they serve as the framework for who we are and how we interact with each other and our customers. These ethics and behavior models are the cornerstones on which we have built our business and our culture.”17 The key issue is the extent to which these ICARE Shared Principles are used in everyday business situations. Do they really guide employee behavior, or are they just a part of public relations?

At McKesson, employees incorporate the ICARE Shared Values into their daily activi- ties. For example, the employees of McKesson’s U.S. Pharmaceutical Distribution center worked long overtime hours after the tragedies of hurricanes Katrina and Rita when assist- ing the Federal Emergency Management Agency (FEMA). One functional-level manager, credits this experience for helping workers to gain a deeper appreciation of the impact their work has on the well-being of thousands of people in need. It also helped families under- stand the importance of what McKesson’s employees do for a living.18

Google’s values also guided some tough strategic decisions.19 In 2006, Google entered the Chinese market with a customized search engine (google.cn) to service some 400 million new online customers. This was a self-censored version of its regular search engine (google. com) to comply with China’s restrictions on free speech. At that time, Google felt the good that access to its searches, albeit censored, would bring to the Chinese people would out- weigh its discomfort with censorship. By 2010, Google felt it could no longer continue to provide self-censored searches; it alleged that the firm was the target of sophisticated hacker attacks, accessing some of its users’ Gmail accounts, including those of Chinese human rights activists. Google decided it would no longer censor its searches in China, thus risking having its search engine shut down by the Chinese government. Google’s strong values— such as “democracy on the web works,” “you can make money without doing evil,” and “the need for information crosses all borders”—guided this decision, which had potentially far- reaching strategic consequences.20 Google now runs its China website on a server in Hong Kong. After several months of negotiations, the Chinese government renewed Google’s

>> LO 2-5 Explain why anchoring a firm in ethical values is essential for long- term success.

organizational values Ethical standards and norms that govern the behavior of individuals within a firm or organization.

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license to do business in China.21 Yet, Google’s exit from mainland China further strength- ened Baidu’s lead with an almost 75 percent share of one of the fastest-growing online markets worldwide.22 Baidu is a domestic Chinese company founded by Robin Li.

In contrast, when a firm does not have strong organizational values to inform the behav- ior of its top managers or other employees, major stakeholder value destruction is likely to follow. In the following examples, managers acted unethically and illegally:

■ Using a giant Ponzi scheme, Bernie Madoff, with the help of several employees in his investment securities firm, defrauded high-profile institutional and individual investors such as bank HSBC, Banco Santander, Human Rights First, the International Olympic Committee, film producer and CEO of DreamWorks Animation Jeffrey Katzenberg, actor Kevin Bacon, and Nobel Peace Prize winner Elie Wiesel. Madoff’s fraud totaled an estimated $65 billion. He was sentenced to 150 years imprisonment and fines of more than $170 billion.23

■ At one time, it was hailed as one of “America’s Best Companies to Work For,” with more than 22,000 employees and over $100 billion in annual revenues. Enron’s mission statement touted integrity as one of its key values. Yet, Enron’s top-level executives were systematically defrauding investors, employees, customers, and other stakehold- ers. Enron’s collapse in 2001 remains one of the biggest bankruptcies in U.S. history. Former Enron president Jeffrey Skilling was convicted of fraud and insider trading and is currently serving a 25-year term in a federal prison. The Enron shockwaves also sank Arthur Andersen, formerly the largest of the big five accounting firms, because of its role as an accomplice in the accounting scandal. Some 30,000 Andersen accountants and consultants lost their livelihoods.24

STRATEGIZING FOR COMPETITIVE ADVANTAGE: HOW IS STRATEGY “MADE”? Since we now have a basic understanding of what strategy is and why it is important (dis- cussed in Chapter 1) as well as vision, mission, and values, we can think about how strategy is made. How does strategy come about? When strategizing for competitive advantage, managers rely on three different approaches that can complement one another: (1) strategic planning, (2) scenario planning, and (3) strategy as planned emergence.

Strategic Planning With the tremendous growth of corporations in the prosperous decades following World War II, corporate executives began to use strategic (or long-range) planning to manage firms more effectively and enhance their performance. Top executives and scholars alike understood strategic planning to be a rational, top-down process through which they could program future success.25 One scholar wrote during this time: “Long-range planning is one of the really new techniques left to management that can give a company a major competitive advantage.”26

With strategic planning, all strategic intelligence and decision-making responsibilities are concentrated in the office of the CEO who, much like a military general, leads the company strategically through competitive battles. Five-year plans, revisited regularly, predict future sales based on anticipated future growth. Strategic planners provide careful analyses of internal and external data and apply it to all quantifiable areas: prices, costs, margins, market demand, head count, and production runs. Top executives tie the alloca- tion of the annual corporate budget to the strategic plan and monitor ongoing performance accordingly. In this process, the formulation of strategy is separate from implementation, and thinking about strategy is separate from doing it.

>> LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications.

strategic (long- range) planning A rational, top-down process through which management can program future success; typically concentrates strategic intelligence and decision-making responsibilities in the office of the CEO.

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Top-down strategic planning works reasonably well when the environment does not change very much, because it rests on the assumption that we can predict the future from the past. One major shortcoming of the strategic planning approach is that we cannot know the future. Unforeseen events can make even the most sci- entifically developed and best formalized plans obso- lete. Moreover, as seen in Chapter 1, the rate of change appears to be increasing, which further undercuts the effectiveness of strategic planning.

Scenario Planning Given that the only constant is change, should man- agers even use strategic planning? The answer is yes, but they also need to expect that unpredictable events will happen. We can compare strategic planning in a fast-changing environment to the operations of a fire department.27 There is no way to know where and when the next emergency will arise, nor can we know its magnitude beforehand. Nonetheless, fire chiefs put contingency plans in place to address a wide range of emergencies along different dimensions. In the same way, scenario planning asks the “what if” questions. It is a strategy-planning activity in which managers envi- sion different scenarios to anticipate plausible futures. As General (and later President) Eisenhower wisely said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”28

In scenario planning, managers envision different what-if scenarios: New laws might restrict carbon emis- sions or expand employee health care. Demographic shifts may alter the ethnic diversity of a nation, while changing tastes or economic conditions will affect consumer behavior. How would those changes affect a firm and how should it respond? Typical scenario plan- ning addresses both optimistic and pessimistic futures. For instance, strategy executives at UPS recently iden-

tified six issues as critical to shaping its future competitive scenarios: (1) the price of oil; (2) climate change; (3) trade barriers (such as “buy American” or “buy Chinese” clauses in new laws around the world); (4) the emerging BRIC (Brazil, Russia, India, and China) economies; (5) political instability; and (6) online commerce worldwide.29 Managers then formulated strategies they can activate and implement should one of the envisioned sce- narios play a more significant role. Strategy Highlight 2.2 shows how the energy company Shell has used scenario planning to significantly improve its performance.

Exhibit 2.2 shows how to use the AFI strategy framework for scenario planning, to create strategic plans that are more flexible, and thus more effective, than the more static strategic planning approach.

In the analysis stage, managers brainstorm to identify possible future scenarios. Input from several different hierarchies within the organization and from different functional areas such as R&D, manufacturing, and marketing and sales is critical. UPS executives

scenario planning Strategy-planning activity in which managers envision different what-if scenarios to anticipate plausible futures.

STRATEGY HIGHLIGHT 2.2

Shell’s Future Scenarios Shell predicts that in 2025 most of our energy will con- tinue to be generated from fossil fuels but 20 percent will come from alternative energy sources like wind, solar, and hydro power. Shell managers thus focus more on fossil fuels in their scenario analysis than on renewable technologies.

Given Shell’s past success in using scenario plan- ning, one ought to pay attention to its predictions. Shell can claim a number of accurate predictions to its credit. In the 1960s, with the price of a barrel of crude oil around $10 (compared to a record high of close to $150 in the summer of 2008), managers at Shell began to formulate strategic plans for a future with a strong OPEC (the cartel of oil-exporting countries) and an accompanying drastic rise in oil prices. When the price of crude oil suddenly surged to over $80 a bar- rel in the late 1970s, Shell was well-positioned to take advantage of this new situation; other oil companies were scrambling to adjust. Shell activated one of its alternative strategic plans that detailed how to obtain crude oil from North Sea drilling, to which the firm had already secured the rights.

In the early 1980s, Shell made strategic prepara- tions to take advantage of another apparently far- fetched scenario when it speculated that communism might fail, bringing down the powerful Soviet Union and ending Soviet artificial restrictions on the supply of natural gas. As a consequence of these strategies, Shell moved from eighth place to become the second- largest oil company in the world.30

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considered how they would compete if the price of a barrel of oil was $35, or $125, or even $200. Managers may also attach probabilities (highly likely vs. unlikely, or 85 per- cent likely vs. 2 percent likely) to different future states.

Managers often overlook pessimistic future scenarios. For example, many were caught off-guard by the recent economic downturn. Managers should consider negative scenar- ios more carefully, for example, how to obtain liquidity when credit and equity markets are tight. This was a serious problem during the 2008–2009 world financial crisis. An exporter like Boeing or Harley-Davidson would want to analyze the impact of shifts in exchange rates on sales and production costs—what if the euro depreciated to $1 per euro, or the Chinese yuan depreciated rather than appreciated?

In the formulation stage, management teams develop different strategic plans to address possible future scenarios. This kind of what-if exercise forces managers to consider contingency plans in the formulation stage, before events occur. Each plan relies on the entire set of analytical tools (which will be introduced in upcoming chapters) to capture the firm’s internal and external environments and to answer several key questions:

■ What resources and capabilities do we need to compete successfully in each future scenario?

■ Which strategic initiatives should we put in place to respond to each? ■ How can we shape our expected future environment?

Identify Multiple Future Scenarios

Execute Dominant Strategic Plan

Develop Strategic Plans to Address Future Scenarios

Create Strategic Options

Through Developing Implementation of Alternative Plan(s)

ANALYSIS FORMULATION

IMPLEMENTATION

Activate New Plan

If Necessary Di

sc ar

d D om

ina nt

Pl an

if Ne

ce ss

ar y

M

onitoring

Perform ance

Fe

ed ba

ck L

oo p

EXHIBIT 2.2

Scenario Planning in the AFI Strategy Framework

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42 PART 1 | Strategy Analysis

By formulating responses to the scenario analysis stage, managers achieve strategic flexibility by building a portfolio of future options. They continue integrating additional information over time, which in turn influences future decisions. Finally, they transform the most viable options into full-fledged strategic plans to be activated when needed.

In the implementation stage, managers activate the dominant strategic plan, the option they think most closely matches reality. If reality changes, managers can quickly retrieve and implement any of the alternate plans developed in the formulation stage. The firm’s perfor- mance in the marketplace provides feedback to the managers concerning the viability of the dominant strategic plan. If the performance feedback is positive, managers continue to pursue the dominant strategic plan, while fine-tuning it in the process. If the performance feedback is negative, managers consider whether modifying the dominant strategic option will enhance firm performance or whether they are better off activating one of the alternative strategic plans.

To conduct successful scenario planning, managers need current information. The network-equipment giant Cisco Systems has invested huge sums in technology to generate just this kind of data.31 Cisco’s senior executives can track daily customer order data from its sales teams around the globe with up-to-the-minute accuracy. Walmart’s CEO Mike Duke indicates that he too is using real-time sales data tracking, enabling top executives to monitor daily sales of each of the over 8,500 Walmart stores worldwide in real time.32 With these real-time data systems, managers can identify emerging trends in each region and market segment long before they materialize in financial data. This in turn allows them to fine-tune their functional strategy with unprecedented accuracy and speed.

The circular nature of the scenario-planning model in Exhibit 2.2 highlights the continu- ous interaction between analysis, formulation, and implementation. Through this interac- tive process, managers can adjust and modify their actions as new realities emerge. The interdependence among analysis, formulation, and implementation also enhances organi- zational learning and flexibility.

“DON’T SEPARATE STRATEGIC ANALYSIS FROM STRATEGIC ACTION!” Critics of strategic planning and scenario planning, most notably Henry Mintzberg of McGill University, argue that strategic planning is not the same as strategic thinking.33 In fact, Mintzberg suggests the strategic planning process often is too regimented and confining and does not allow for strategic thinking. Managers doing strategic planning may fall prey to an illusion of control—the hard numbers in a strategic plan can convey a false sense of security. To be successful, say these critics, a strategy should be based on an inspiring mission, and not on hard data alone. They advise that managers should focus on all types of information sources, including “soft” sources that can generate new insights, such as personal experience or the experience of front-line employees. The important work, say the critics of strategic planning, is to synthesize all available input into an overall strategic mission, which should then guide the firm’s strategy.

Indeed, some companies choose not to articulate a corporate or business strategy. Rather, they focus on consistency in strategic actions across all levels of the organization.34 For example, Nucor Corporation had 2010 sales of $16 billion and employed 22,500 people (fewer than 100 of them in its corporate headquarters), making it the largest steel maker in the United States.35 Nucor has been profitable for several decades and has never laid off an employee for lack of work. Its employees are among the highest paid in the industry (two-thirds of their compensation is performance-related), and it has the lowest labor cost per ton of steel produced. Yet Nucor has no written strategic plan, no written mission state- ment, and no written goals and objectives. It does, however, have a strong organizational culture based on peer control combined with a set of clear operational rules supporting its functional-level strategy.36

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How can a company like Nucor be so successful without an overarching strategic plan? Because lack of a written strategic plan does not indicate lack of a strategy. We can deduce a firm’s strategy from the pattern of its actions.37 Indeed, everything Nucor’s managers and employees do across all levels of the organization indicate its strategy of cost leadership (providing an acceptable standard of product quality or value to the cus- tomer at the lowest cost to produce it). The absence of an explicitly formulated plan may give Nucor flexibility to more quickly react to changes in the marketplace. In addition, it may make Nucor’s strategy less transparent and its future strategic moves less obvi- ous to competitors. All this contributes to protecting and sustaining Nucor’s competitive advantage.

Strategy as Planned Emergence: Top-Down and Bottom-Up We now come to the third approach to strategizing for competitive advantage. In contrast to the two rational planning approaches just discussed, another view considers less formal and less stylized approaches to the development of strategy.

A strategic initiative is any activity a firm pursues to explore and develop new prod- ucts and processes, new markets, or new ventures. Strategic initiatives can come from anywhere. They could be the result of top-down planning by executives, and they also can emerge through a bottom-up process. Strategic initiatives can emerge from deep within a firm through autonomous actions by lower-level employees, from random events, and maybe even luck.38 Consider the following examples, in which the impulse for strategic initiatives emerged from the bottom up.

■ Google’s Vice President Marissa Mayer reports that 50 percent of the firm’s new prod- ucts come from the 20 percent rule, which allows all employees to spend one day a week (20 percent of the workweek) on ideas of their own choosing. Examples of innovations that resulted from the 20 percent rule include Gmail, Google News, and Orkut.39

■ A mid-level engineer at General Electric in 2001 proposed buying Enron Wind, a division that was up for sale as part of Enron’s bankruptcy proceedings. CEO Jack Welch’s response was that GE wouldn’t touch anything with the name Enron on it, given its large-scale accounting fraud. When the mid-level engineer kept insisting, after being rejected several times, GE’s leadership relented and bought Enron Wind for $200 million. It turned out to be a huge success, with revenues over $6 billion in 2009, and it opened up other significant opportunities for GE in the alternative-energy industry such as its ecomagination initiative. GE’s shift from a product-oriented com- pany (“We bring good things to life”) to a more consumer-oriented one (“Imagination at work”) was part of the leadership change from Jack Welch to Jeffrey Immelt, who approved the investment in Enron Wind.40

A firm’s actual strategy, therefore, is often a combination of its top-down strategic intentions (which typically are expressed in written strategic plans) and bottom-up emergent strategy.41 An emergent strategy describes any unplanned strategic initiative undertaken by mid-level

dominant strategic plan The strategic option that managers think most closely matches reality at a given point in time.

strategic initiative Any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures.

emergent strategy Any unplanned strategic initiative undertaken by mid-level employees of their own volition.

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44 PART 1 | Strategy Analysis

employees of their own volition.42 If successful, emer- gent strategies have the potential to influence and shape a firm’s strategy. Strategy Highlight 2.3 provides further evidence for the notion that successful emergent strate- gies are sometimes the result of serendipity combined with the tenacity of lower-level employees.

MINTZBERG’S PLANNING FRAMEWORK. To reflect the reality that strategy can be planned or can emerge from the bottom up, Mintzberg developed a more integrative and complete framework for s trategy- making, shown in Exhibit 2.3.

According to this more holistic model, the strategy process may begin with a top-down strategic plan. Based on external and internal analyses, top-level executives design an intended strategy—the outcome of a rational and structured, top-down strategic plan. This is the first important step in strategy-making. However, in today’s complex and uncertain world, unpredicted events can have huge effects. Very few people predicted, for example, that easy credit would lead to a housing bubble. The bursting of that bubble in 2008 rendered obsolete the best-laid strategic plans of financial, mortgage and insurance companies like Bank of America, Citigroup, Fannie Mae, Freddy Mac, and AIG. Indeed, most of these venerable institutions and many other firms would have faced bankruptcy were it not for a government bailout of $10 trillion.44

Unpredicted changes don’t have to be cataclysmic, however, to be disruptive. Apple’s hugely popular iPod and iPhone upset the strategic plans of a number of companies including Nokia, Sony, and RIM (the maker of the BlackBerry), forcing them to respond. Apple is trying to repeat this feat with its iPad, which could lead to industry convergence in computing, telecommunications, and media.45 When unexpected events have dramatic strategic implications, part (or all) of a firm’s strategic plan becomes an unrealized strategy and falls by the wayside.

Sometimes new ideas for strategic initiatives pop up in unusual ways. In these instances, astute man- agers combine serendipity and bottom-up emergent strategy into a successfully realized strategy. An unexpected event at the largest rail carrier in the world, Japan Railways, led to diversification from railroads into bottled water.46 This may sound far- fetched, but here is how it happened: Japan Railways was constructing a new bullet train through the moun- tains north of Tokyo, requiring many tunnels. In one

STRATEGY HIGHLIGHT 2.3

Starbucks’s CEO: ”It’s Not What We Do!” Diana, a Starbucks store manager in southern California, received several requests a day for an iced beverage offered by a local competitor. After she received more than 30 requests one day, she tried the beverage herself. Thinking it might be a good idea for Starbucks to offer a similar iced beverage, she requested that headquarters consider adding it to the product lineup. Diana had an internal champion in Howard Behar, then one of Starbucks’s top execu- tives. Mr. Behar presented this strategic initiative to the Starbucks executive committee on which he sat, but it was voted down in a 7:1 vote. Starbucks’s CEO Howard Schultz commented, “We do coffee, we don’t do iced drinks.”

Diana, however, was undeterred. She started experimenting with a blender to re-create this specific drink. Satisfied with her results, she began to offer the drink in her store. When Howard Behar visited Diana’s store, he was shocked to see this new drink on the menu—all Starbucks stores were supposed to offer only company-approved drinks. But Diana told him the new drink was selling well.

Howard Behar flew Diana’s team (and her blender) to Starbucks headquarters in Seattle, to serve this new drink to the executive committee. They liked the drink, but still said no. Then Behar pulled out the sales num- bers that Diana had carefully kept. The drink was sell- ing like crazy: 40 drinks a day the first week, 50 drinks a day the next week, and then 70 drinks in the third week after introduction. They had never seen such growth numbers. These results persuaded the executive team to give reluctant approval to introduce the drink in all Starbucks stores. You’ve probably by now guessed the drink—Starbucks’s Frappuccino. Frappuccino is now a billion-dollar business for Starbucks, and at one point brought in more than 20 percent of Starbucks’s total revenues (which were $11 billion in 2010).43

As the Starbucks example shows, companies can benefit from an attitude of “expect the unexpected, and react to it strategically”! Strategy can be planned, but sometimes important strategic initiatives simply emerge from the bottom up.

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52 Managing Stratregy in The Global Marketplace

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of the mountains, persistent flooding caused huge problems. Engineers responded by drawing up complex plans to drain the water. Meanwhile, workers inside the tunnel were making good use of the water—they were drinking it. A maintenance worker suggested the water should not be pumped away but rather bottled and sold as premium drinking water because it tasted so fresh. Its source was snow pack, purified and filtered in the slow percolation process through the mountain’s geological layers and enhanced on the way with healthy amounts of calcium, potassium, and magnesium. Eventually, Japan Railways set up vending machines on 1,000 railroad platforms in and around Tokyo, and home delivery of water, juices, and coffee followed. The employee’s proposal had turned an expensive engineering problem into a multimillion-dollar business. Because Japan Railways was willing to define its business as broader than just being in railroads, it was able to capture the emergent strategy and diversify into drinking water.

Bottom-up strategies can also emerge as a consequence of the firm’s resource alloca- tion process (RAP).47 The core argument linking the RAP and strategy is that the way a firm allocates its resources can be critical in shaping its realized strategy.48 Intel Corp.’s famous rule to “maximize margin-per-wafer-start” illustrates this concept.49 Intel was founded in 1968 to produce DRAM (dynamic random-access memory) chips. From the start, producing these chips was the firm’s top-down strategic plan, and initially it worked well. However, in the 1980s, Japanese competitors brought better-quality chips to the market at lower cost, threatening Intel’s position and strategic plan. Intel was able, how- ever, to pursue a strategic transformation due to the way it set up its RAP. In a sense, Intel was using functional-level strategies to drive business and corporate strategies. In particular, during this time Intel had only a few “fabs” (fabrication plants to produce silicon-based products). It would have taken several years and billions of dollars to build additional fabs.

intended strategy The outcome of a rational and structured top-down strategic plan.

unrealized strategy Part or all of a firm’s strategic plan that falls by the wayside due to unexpected events.

realized strategy Combination of intended and emergent strategy.

Bottom-up Emergent Strategy • Autonomus Actions

• Serendipity • Resource Allocation Process

• Real Options

Realized Strategy

Unrealized Strategy

• Unpredictable Events

Intended Strategy

• Top-down Strategic Plan

EXHIBIT 2.3

Realized Strategy Is a Combination of Top-down Intended Strategy and Bottom-up Emergent Strategy Source: Adapted from H. Mintzberg and A. McHugh (1985), “Strategy formation in an adhocracy,” Administrative Science Quarterly 30: 162.

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46 PART 1 | Strategy Analysis

Since Intel’s production capacity was constrained, it had implemented the decision rule to “maximize margin-per-wafer-start.” Each time functional managers initiated a new pro- duction run, they were to consider the profit margins for DRAM and for semiconductors (the “brains” of personal computers), and then to produce whichever product delivered the higher margin. Following this simple rule, front-line managers shifted Intel’s production capacity away from the low-margin DRAM business to the higher-margin semiconductor business. The firm’s focus on semiconductors thus emerged from the bottom up, based on resource allocation and without top-management planning. Indeed, by the time top- management finally approved the de facto strategic switch, the company’s market share in DRAM had dwindled to less than 3 percent.50

Taken together, the Japan Railways and Intel examples demonstrate that a firm’s realized strategy is frequently a combination of top-down strategic intent and bottom-up emergent strategies, as Exhibit 2.3 shows. Strategy-making has thus been called by some planned emergence, in which organizational structure and systems allow bottom-up strategic initia- tives to emerge and be evaluated and coordinated by top management.51

A word of caution is in order: Not all emergent strategies are successful. As the story of Microsoft’s Keywords in Chapter 1 shows, promising strategic initiatives can emerge from deep within the company, but top managers must have a system in place that allows them to judge whether to support those initiatives and allow them to influ- ence and shape the firm’s overall strategy. Although Microsoft missed the opportunity to lead in online search and advertising, it has a history of adapting successfully to quickly evolving environments. Mid-level Microsoft employees envisioned and devel- oped both Internet Explorer (the leading web browser with more than two-thirds market share) and the Xbox videogame system to address threats posed by Netscape and Sony’s PlayStation.

Implications for the Strategist What approach can managers take to ensure that potentially high-impact strategic initia- tives receive due consideration? When new ideas emerge, managers can go beyond stan- dard evaluation metrics like net present value (NPV) and apply a real options perspective.52 Both NPV and real options are tools taught in corporate finance. They provide critical information when a firm is making strategic decisions.

Though widely used, the net present value calculation is often inappropriate to assess the potential of highly uncertain strategic initiatives: It applies a high discount rate on the net present value of future cash flows, to reflect the high risk of these initiatives. At the same time, it ignores the potentially huge upside of such strategic initiatives. Applying net present value calculations, therefore, frequently leads to a premature death of strate- gic initiatives such as the Keywords project within Microsoft. Since there was no viable business model for it, shutting it down—based on an NPV calculation—was a rational decision.

In contrast, applying a real-options perspective to strategic decision making would break down a large investment decision into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information in planned stages. At each stage, the firm evaluates a real option, which is the right, but not the obligation, to make a business decision. (Real options are sometimes called strategic options, to differ- entiate them from financial options.) Unlike the final “go or no-go” decision that an NPV calculation requires, applying a real-options framework allows managers to break down a big decision into smaller, stepped decisions based on a sequence of option payments over time. The idea is to keep the firm’s alternatives open so that more information can reveal

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itself. Basically, managers are keeping open the possibility of changing the scope or t iming of projects and other strategic initiatives, or even abandoning them altogether, as new infor- mation emerges.

Some cost is always involved in a real-options approach, but it’s often less cost than a full-bore investment in a project that will not pan out. This approach reduces the uncer- tainty that surrounds the value of a bottom-up strategic initiative. Moreover, it prevents prematurely closing down a strategic initiative that is of high potential, but whose potential is revealed only at a later date. For example, rather than shutting down the Keywords ini- tiative, Microsoft could have invested some money in it, to see if a business opportunity would arise.

A profitable business model in online search was demonstrated by Yahoo and later by Google. Microsoft’s CEO Ballmer now attempts to apply a real-options perspective to emerging strategic initiatives: “The biggest mistakes I claim I’ve been involved with is where I was impatient—because we didn’t have a business yet in something, we should have stayed patient. If we’d kept consistent with some of the ideas, we might have been in paid search. We are letting more flowers bloom.”53 Basically, the idea is not to shut down strategic experiments prematurely to foreclose future options. This approach requires not only application of a real-options perspective, but also recognition of strategy as planned emergence.

Here, we conclude our discussion of the strategic management process, which marks the end of the “getting started” portion of the AFI framework. The next chapter moves us into the analysis part of the framework—where we begin by studying the important topics of external and internal analysis, followed by consideration of how competitive advantage can be measured.

I N FEBRUARY 2011, Teach For America (TFA) celebrated its 20th anniversary. In those 20 years, it has grown into a $212 million organization that attracted 12 percent of all Ivy League seniors in its

2010 application pool.54 Studies show that TFA teach- ers have a stronger positive effect on high-school stu- dents’ test scores than regular certified teachers—and that the performance difference was especially pro- nounced in math and science.55

A recent publication by TFA notes that teacher effectiveness is improved when teachers have course objectives that are “student-achievement based, mea- sureable, and rigorous.” Such course objectives are, in effect, mission statements. According to TFA, a poorly worded objective might be “The teacher will present

a lesson on ordering fractions with different denominators.” An improved objective would be “The student will be able to order fractions with different denominators.”56

1. What role (if any) do you think TFA’s vision statement may have had in the success of the organization?

2. How has TFA succeeded in recruiting so many Ivy League students into teaching in the lowest- performing regions of the United States?

3. Do you think TFA could have been just as suc- cessful if it had been structured as a traditional for-profit company?

CHAPTERCASE 2 Consider This . . .

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48 PART 1 | Strategy Analysis

This chapter explained the role of vision, mission, and values in the strategic management process and gave an overview of how strategy is made, as summarized by the following learning objectives and related take- away concepts.

LO 2-1 Explain the role of vision, mission, and values in the strategic management process. >> A vision captures an organization’s aspirations.

An effective vision inspires members of the organization.

>> A mission statement describes what an organiza- tion actually does—what its business is—and why it does it.

>> Values define the ethical standards and norms that should govern the behavior of individuals within the firm.

>> Success is created twice: first by creating a men- tal model of what the firm wants to accomplish, and second by formulating and implementing a strategy that makes this vision a reality.

LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals. >> Strategic intent finds its expression in stretch

goals that exceed the firms’ existing resources and capabilities by a large margin.

>> Effective use of strategic intent creates at all levels of the organization an obsession with win- ning that can help companies ascend to global leadership.

LO 2-3 Distinguish between customer- oriented and product-oriented missions and identify strategic implications. >> Customer-oriented missions define business in

terms of providing solutions to customer needs. >> Product-oriented missions define a business in

terms of a good or service provided.

>> Customer-oriented missions provide managers with more strategic flexibility than product- oriented missions.

LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. >> Mission statements can help a firm achieve

superior performance, but mission statements by themselves do not directly affect firm performance.

>> To be effective, mission statements need to be backed up by hard-to-reverse commitments.

LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success. >> Ethical core values enable employees to make

day-to-day decisions that are guided by correct principles.

>> Strong ethical values are the guardrails that help keep the company on track when pursuing its mission and its quest for competitive advantage.

LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. >> Top-down strategic (long-range) planning works

reasonably well when the environment does not change much.

>> In scenario planning, managers envision different what-if scenarios and prepare contingency plans that can be called upon when necessary.

>> Strategic initiatives can be the result of top-down planning by executives or can emerge through a bottom-up process from deep within the organization.

>> A firm’s realized strategy is generally a com- bination of its top-down intended strategy and bottom-up emergent strategy, resulting in planned emergence.

Take-Away Concepts

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Dominant strategic plan (p. 42)

Emergent strategy (p. 43)

Intended strategy (p. 44)

Mission (p. 34)

Organizational values (p. 38)

Realized strategy (p. 44)

Scenario planning (p. 40)

Strategic commitments (p. 37)

Strategic initiative (p. 43)

Strategic intent (p. 33)

Strategic management process (p. 32)

Strategic (long-range) planning (p. 39)

Unrealized strategy (p. 44)

Vision (p. 32)

Key Terms

1. What characteristics does an effective mission statement have?

2. What is strategic intent? How can it be useful for goal set- ting and achievement?

3. In what situations is top-down planning likely to be superior

to bottom-up emergent strat- egy development?

4. Based on discussions in this chapter, which railroad firm seems more prepared to use planned emergence, CSX or Japan Railways? Why?

5. Discuss how scenario plan- ning can be used to prepare a firm for future events. Can some industries benefit more than others from this type of process?

Discussion Questions

1. As noted in the “Living the Values” section, over 50,000 people lost their jobs and many their life savings in the Enron debacle. Some of those at Enron who were closely involved in the scan- dal, such as Jeffrey Skilling (CEO) and Andrew Fastow (CFO), are serving significant prison sentences. What responsibility do lower-level executives bear for not reporting such question- able practices by the firm’s leadership? Why do you think only one employee initially came for- ward to report the irregularities and help with the investigation?

2. In the circumstance when an emergent idea arises that appears to mid-level managers to have strong merits yet conflicts with an existing intended strategy from the top managers, how would you suggest the organization decide which idea to push forward into a plan of action and thus con- tribute to a realized strategy? What would you do in this situation if you were (a) a mid-level man- ager or (b) an executive?

Ethical/Social Issues

SMALL GROUP EXERCISE 1 The National Aeronautics and Space Administration (NASA) is leading the public space program in the United States. Its vision is “to advance U.S. scien- tific, security, and eco nomic interests through a robust space exploration program.” Its mission is “to pioneer the future in space exploration, scientific discovery, and aeronautics research.” To accomplish its vision

and mission, in 2006 NASA specified a set of six stra- tegic goals to be accomplished over the next 10 years:

1. Fly the Shuttle as safely as possible until its retirement, not later than 2010.

2. Complete the International Space Station in a man- ner consistent with NASA’s International Partner commitments and the needs of human exploration.

Small Group Exercises

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50 PART 1 | Strategy Analysis

3. Develop a balanced overall program of science, exploration, and aeronautics consistent with the redirection of the human spaceflight program to focus on exploration.

4. Bring a new Crew Exploration Vehicle into ser- vice as soon as possible after Shuttle retirement.

5. Encourage the pursuit of appropriate partnerships with the emerging commer cial space sector.

6. Establish a lunar return program having the maxi- mum possible utility for later missions to Mars and other destinations.

NASA’s quest to accomplish these goals is grounded in its values of (1) safety, (2) teamwork, (3) integrity, and (4) mission success. In NASA’s strate- gic plan, each of the six strategic goals is broken down into a number of detailed sub-goals. These goals are accompanied by a detailed list of expected outcomes that enables NASA to measure its progress and report its accomplishments back to its stakeholders. Michael Griffin, the NASA Administrator when the strategic plan was devised, said that “By pursuing the goals of the Vision for Space Exploration, NASA will contrib- ute to American leadership in defining and pursuing the frontiers that expand humankind’s reach, and we will help keep our nation at the cutting edge of sci- ence and technology. We also will work with other nations to do those things that fulfill the dreams of humankind, dreams that always have included the desire to see what lies beyond the known world.”57

1. How is NASA including its mission and values in its strategic planning to make its goals become reality?

2. Do you think a 10-year planning horizon is realis- tic? Why or why not?

3. Do you agree with Michael Griffin’s interpreta- tion of the expected results of pursuing NASA’s mission? Discuss why or why not.

SMALL GROUP EXERCISE 2 In many situations, promising ideas emerge from the lower levels of an organization only to be discarded before they can be tested and implemented. It was only due to extraordinary tenacity (and indeed disregard) for the policy of selling only corporate-approved drinks that permitted the Frappuccino to “bloom” within Starbucks (see Strategy Highlight 2.3). Some scholars have suggested that companies should set aside up to 2 percent of their budgets for any manager with budget control to be able to invest in new ideas within the com- pany.58 (Someone with a $100,000 annual budget to manage would be able to invest $2,000 in cash or staff time toward such a project. Multiple managers could go in together for somewhat larger funds or time amounts.)

Through such a process, the organization can gener- ate a network of “angel investors.” Small funds or staff time can be invested into a variety of projects. Approval mechanisms would be easier for these small “seed stock” ideas, to give them a chance to develop before going for bigger funding at the top levels of the organization.

What would be some problems that would need to be addressed to introduce this “angel network” idea into a firm? Use a firm someone in your group has worked for or knows well to discuss possible issues of widely distributing small funding level approvals across the firm.

MODULE 2: MISSION, GOALS, AND THE STRATEGIC MANAGEMENT PROCESS

1. Search for a mission statement for the firm. Not all organizations publish such a statement, so alternatively you can look for enduring prin- ciples and values upon which the firm seems to be anchored. This information is often available at the firm’s website (though it may take some searching) or is contained in its annual reports. You may also interview a manager of the firm or contact “investor relations.”

2. Identify the major goals of the company.

3. Does the firm seem to have any longer-term chal- lenging or stretch goals that would serve as its strategic intent?

4. Trace any changes in strategy that you can iden- tify over time. Try to determine whether the stra- tegic changes of your selected firm are a result of intended strategies, emergent strategies, or some combination of both.

Strategy Term Project

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myStrategy HOW MUCH ARE YOUR VALUES WORTH TO YOU?

H ow much are you willing to pay for the job you want? This may sound like a strange question, since your employer will pay you to work, but think again.

Consider how much you value a specific type of work, or how much you would want to work for a specific organiza- tion because of its values.

A recent study shows scientists who want to continue engaging in research will accept some $14,000 less in annual salary to work at an organization that permits them to publish their findings in academic journals, implying that some scien- tists will “pay to be scientists.” This finding appears to hold in the general business world, too. In a recent survey, 97 per- cent of Stanford MBA students indicated they would forgo some 14 percent of their expected salary, or about $11,480 a year, to work for a company that matches their own values with concern for stakeholders and sustainability. According

to Monster.com, an online career service, about 92 percent of all undergraduates want to work for a “green” company. These diverse examples demonstrate that people put a real dollar amount on pursuing careers in sync with their values.

On the other hand, certain high-powered jobs such as management consulting or investment banking pay very well, but their high salaries come with strings attached. Professionals in these jobs work very long hours, including weekends, and often take little or no vacation time. These workers “pay for pay” in that they are often unable to form stable relationships, have little or no leisure time, and some- times even sacrifice their health. People “pay for”—make certain sacrifices for—what they value, because strategic decisions require important trade-offs.59

1. What values are (were) most important to you in your career choice?

2. How much less salary would (did) you accept to find employment with a company that is in line with your values?

1. This ChapterCase is based on the following sources: Frankl, V. E. (1984), Man’s Search for Meaning (New York: Washington Square Press); Kopp, W. (2001), One Day, All Children…: The Unlikely Triumph of Teach For America and What I Learned Along the Way (Cambridge, MA: Perseus Book Group); Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student performance in high school,” Urban Institute, March 27; and data from the U.S. Census Bureau, www. hernandezcollegeconsulting.com/ ivy-league-admission-statistics-2009/.

2. Frankl, V. E. (1984), Man’s Search for Meaning.

3. Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student perfor- mance in high school.”

4. This section is based on: Hamel, G., and C. K. Prahalad (1989), “Strategic intent,” Harvard Business Review (May–June): 64–65; and Hamel, G., and

C. K. Prahalad (1994), Competing for the Future (Boston, MA: Harvard Business School Press).

5. Locke, E. A., and G. P. Latham (1990), A Theory of Goal Setting and Task Performance (Englewood Cliffs, NJ: Prentice Hall).

6. Hamel, G., and C. K. Prahalad (1989), “Strategic intent,” Harvard Business Review; and Hamel, G., and C. K. Prahalad (1994), Competing for the Future.

7. This Strategy Highlight is based on: Heath, C., and D. Heath (2007), Made to Stick. Why Some Ideas Survive and Others Die (New York, NY: Random House), pp. 93–95; and www.sony.net/ SonyInfo/CorporateInfo/History/history. html.

8. The Disney and Subway discussion is based on: Heath, C., and D. Heath (2007), Made to Stick, pp. 60–61.

9. “The three habits…of highly irritat- ing management gurus,” The Economist, October 22, 2009.

10. Author’s interviews with Blaine Lawlor, former staff analyst at Shell Canada, and now a strategic manage- ment professor at the University of West Florida, November 6–7, 2009.

11. Collins, J. C., and J. I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: Harper Collins). Collins and Porras define visionary companies as follows: “Visionary companies are premier institutions—the crown jewels—in their industries, widely admired by their peers and having a long track record of mak- ing a significant impact on the world around them” (p. 1).

12. www.merck.com.

13. George W. Merck, address to the Medical College of Virginia, Richmond, VA (December 1, 1950), quoted in Collins, J. C., and J. I. Porras (1994), Built to Last, p. 48.

14. Rothaermel, F. T., K. Grigoriou, and V. Eberhardt (2013), “Better World Books: Social Entrepreneurship and

Endnotes

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Strategic Management: Concepts 59

52 PART 1 | Strategy Analysis

the Triple Bottom Line,” case study, in Rothaermel, F. T., Strategic Management (Burr Ridge, IL: McGraw-Hill).

15. Burgelman, R. A., and A. S. Grove (1996), “Strategic dissonance,” California Management Review 38: 8–28; and Grove, A. S. (1996), Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company (New York: Currency Doubleday).

16. Dixit, A., and B. Nalebuff (1991), Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life (New York: Norton); and Brandenburger, A. M., and B. J. Nalebuff (1996), Co-opetition (New York: Currency Doubleday).

17. www.mckesson.com.

18. Ibid.

19. The original statement about Google’s new approach to China is at http://googleblog.blogspot.com/2010/01/ new-approach-to-china.html. Other sources: “Google threat jolts China web users,” The Wall Street Journal, January 13, 2010; and “Flowers for a funeral,” The Economist, January 14, 2010.

20. Google’s values are at www.google. com/corporate/tenthings.html.

21. “China renews Google’s license,” The Wall Street Journal, July 11, 2010.

22. “How Baidu won China,” Bloomberg BusinessWeek, November 11, 2010.

23. “Q&A on Madoff case,” The Wall Street Journal, March 12, 2009.

24. “Watch out! If your mission state- ment is a joke, Enron may be the punch- line,” Entrepreneur Magazine, May 2002; and McLean, B., and P. Elkind (2003), The Smartest Guys in the Room. The Amazing Rise and Scandalous Fall of Enron (New York: Portfolio).

25. This discussion is based on: Mintzberg, H. (1993), The Rise and Fall of Strategic Planning: Reconceiving Roles for Planning, Plans, and Planners (New York: Simon & Schuster); and Mintzberg, H. (1994), “The fall and rise of strategic planning,” Harvard Business Review (January– February): 107–114.

26. Payne, B. (1956), “Steps in long- range planning,” Harvard Business Review (March–April): 97–106.

27. Grove, A. S. (1996), Only the Paranoid Survive.

28. As quoted in Rothaermel, F. T. (2008), “Competitive advantage in tech- nology intensive industries,” Advances in the Study of Entrepreneurship, Innovation, and Economic Growth 18: 203–226.

29. Personal communication with UPS strategy executives during onsite visit in corporate headquarters, June 17, 2009.

30. This Strategy Highlight is based on: deGeus, A. P. (1988), “Planning as learning,” Harvard Business Review (March–April); Grant, R. M. (2003), “Strategic planning in a turbulent environment: Evidence from the oil majors,” Strategic Management Journal 24: 491–517; Willmore, J. (2001), “Scenario planning: Creating strat- egy for uncertain times,” Information Outlook (September); and “Shell dumps wind, solar, and hydro power in favour of biofuels,” The Guardian, March 17, 2009.

31. “Managing in the fog,” The Economist, February 26, 2009.

32. Duke, M. T. (CEO of Walmart) (2010), presentation at Georgia Institute of Technology, April 1; and Walmart–Corporate Fact Sheet (walmart- stores.com).

33. Mintzberg, H. (1993), The Rise and Fall of Strategic Planning; and Mintzberg, H. (1994), “The fall and rise of strategic planning.”

34. Inkpen, A., and N. Choudhury (1995), “The seeking of strategy where it is not: Toward a theory of strategy absence,” Strategic Management Journal 16: 313–323.

35. www.nucor.com.

36. See discussion on Nucor in Chapter 11, “Organizational Design: Structure, Culture, and Control.”

37. Mintzberg, H., and J. A. Waters (1985), “Of strategies, deliberate and emergent,” Strategic Management Journal 6: 257–272.

38. Arthur, B. W. (1989), “Competing technologies, increasing returns, and lock-in by historical events,” Economic Journal 99: 116–131; and Brown, S. L., and K. M. Eisenhardt (1998), Competing on the Edge. Strategy as Structured Chaos (Boston, MA: Harvard Business School Press).

39. Mayer, M. (2006), “Nine lessons learned about creativity at Google,” presentation at Stanford Technology Ventures Program, May 17.

40. John Rice (GE Vice Chairman, President & CEO, GE Technology Infrastructure) (2009), presentation at Georgia Institute of Technology, May 11.

41. Mintzberg, H., and A. McHugh (1985), “Strategy formation in an adhoc- racy,” Administrative Science Quarterly 30: 160–197.

42. Ibid.; and Hill, C. W. L., and F. T. Rothaermel (2003), “The perfor- mance of incumbent firms in the face of radical technological innovation,” Academy of Management Review 28: 257–274.

43. Based on Howard Behar (retired President, Starbucks North America and Starbucks International) (2009), Impact Speaker Series Presentation, College of Management, Georgia Institute of Technology, October 14. See also Behar, H. (2007), It’s Not About the Coffee: Leadership Principles from a Life at Starbucks (New York: Portfolio).

44. “U.S. taxpayers risk $9.7 trillion on bailout programs,” Bloomberg News, February 9, 2009.

45. “The book of Jobs,” The Economist, January 28, 2010.

46. This example is based on Robinson, A. G., and S. Stern (1997), Corporate Creativity: How Innovation and Improvement Actually Happen (San Francisco, CA: Berret-Koehler Publishers).

47. Bower, J. L. (1970), Managing the Resource Allocation Process (Boston, MA: Harvard Business School Press); Bower, J. L., and C. G. Gilbert (2005), From Resource Allocation to Strategy (Oxford, UK: Oxford University Press); Burgelman, R. A. (1983), “A model of the interaction of strategic behavior, cor- porate context, and the concept of strat- egy,” Academy of Management Review 8: 61–71; and Burgelman, R. A. (1983), “A process model of internal corporate venturing in a major diversified firm,” Administrative Science Quarterly 28: 223–244.

48. Bower, J. L., and C. G. Gilbert (2005), From Resource Allocation to Strategy.

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60 Managing Stratregy in The Global Marketplace

CHAPTER 2 | The Strategic Management Process 53

54. “What They’re Doing After Harvard,” The Wall Street Journal, July 10, 2010.

55. Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student perfor- mance in high school.”

56. “Teaching as leadership: The highly effective teachers’ guide to closing the achievement gap,” Jossey-Bass, February 3, 2010.

57. “2006 NASA Strategic Plan,” NASA (www.nasa.gov).

58. Hamel, G. (2007), The Future of Management (Boston, MA: Harvard Business School Publishing).

59. This myStrategy vignette is based on Stern, S. (2004), “Do scientists pay to be scientists?” Management Science 50(6): 835–853; and Esty, D. C., and A. S. Winston (2009), Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, revised and updated (Hoboken, NJ: John Wiley).

dynamics for corporate longevity,” Strategic Management Journal 28: 965–979.

52. Dixit, A. K. S., and R. Pindyck (1994), Investment Under Uncertainty (Princeton, NJ: Princeton University Press); Amram, M., and N. Kulatilaka (1998), Real Options: Managing Strategic Investment in an Uncertain World (Boston, MA: Harvard Business School Press); McGrath, R. G., and I. C. MacMillan (2000), “Assessing technology projects using real options reasoning,” Research Technology Management 43: 35–49; Hill, C. W. L., and F. T. Rothaermel (2003), “The per- formance of incumbent firms in the face of radical technological innovation”; and Adner, R., and D. A. Levinthal (2004), “What is not a real option: Considering boundaries for the application of real options to business strategy,” Academy of Management Review 29: 74–85.

53. “Microsoft bid to beat Google builds on a history of misses,” The Wall Street Journal, January 16, 2009.

49. Burgelman, R. A. (1994), “Fading memories: A process theory of strategic business exit in dynamic environments,” Administrative Science Quarterly, 39: 24–56.

50. Burgelman, R. A., and A. S. Grove (1996), “Strategic dissonance,” California Management Review 38: 8–28.

51. Grant, R. M. (2003), “Strategic planning in a turbulent environment: Evidence from the oil majors,” Strategic Management Journal 24: 491–517; Brown, S. L., and K. M. Eisenhardt (1997), “The art of continuous change: Linking complexity theory and time- based evolution in relentlessly shifting organizations,” Administrative Science Quarterly 42: 1–34; Farjourn, M. (2002), “Towards an organic perspec- tive on strategy,” Strategic Management Journal 23: 561–594; Mahoney, J. (2005), Economic Foundation of Strategy (Thousand Oaks, CA: Sage); and Burgelman, R. A., and A. S. Grove (2007), “Let chaos reign, then rein in chaos – repeatedly: Managing s trategic

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Strategic Management: Concepts 61

Week 5 Individual Assignment

Instructions:

The individual assignment asks you to describe and critique a real-world enterprise's operations, information, and marketing management strategies as to how they support the enterprise strategy.

· The real-world enterprise is  Toyota Motor Corporation , the world's #1 motor vehicle maker by sales, with operations in well over 100 countries.  Its marketing is localized wherever it sells.

· Use the assigned readings, posted learning materials, online research (one of the current MBA Competencies that you have attained by now), and your personal knowledge and experience to develop the report.

· You should also build on what you learned in these areas in earlier coursework, to include AMBA 640 and AMBA 650

· Be succinct, a virtue in management reporting. Ten double-spaced pages should be more than enough for this assignment.

Answer the questions bellow in the paper:

· This week we continue the exploration of the “enterprise management” concept of strategy by looking at a real-world operation’s enterprise operations, information management, and marketing management. The company you will be using is Toyota. The individual project is a 10 page (about) paper using the professional format we have discussed.

· Consider what we have discussed about the three (or four) business types (for profit, non-profit, government, military) and how they differed. What has Toyota adopted from these various types to be successful? What do they do, if anything, that is unsuccessful? How is their operation set up? How is it the same or different than others in their industry? Why?

· How do they use their information system? How is it the same or different than their competitors? How do they use their information system as a competitive advantage? How does this information advantage (if there is one) play to their strategic aims and achievement of their strategy compared to the rest of the industry and their grand strategy in general?

· Finally, how does their marketing management, as opposed to their marketing strategy, add to the company’s overall strategic aims? Be sure to take a step back and realize there is a difference between marketing strategy (how they choose to market their product to meet the overall strategic aims of the company) and the marketing management (how the company chooses to implement it strategy) that goes on. Without understanding the difference, the two will get mixed up and muddied very easily.

Remember to include a results-filled executive summary at the beginning of your report.

I will check all of the formatting criteria. I don’t need any manipulations of spacing or margin sizes.

· Times New Roman

· 12-PT Font

· 1” Margins

· 8-10 Pages (No less but no more than 10 pages)

· Table of Contents, Executive Summary, and References do not count as a page

· Grad-Level Writing

· 0% Plagiarism

· Must have 4 outside sources (Minus Wiki)

· MUST, Absolutely MUST use the three PDF files as sources

· Include Introduction, Conclusion, Table of Contents & Executive Summary

1. Submit, on time.

a. Unexcused lateness will be penalized per AMBA policy, found in the course syllabus.

2. Meet each task specified by your section professor in their instructions for the IA/EOCP.          /75 points

a. Includes: make few or no grammatical, spelling, or syntactical errors.

3. Show any or all of the following:         /15 points

· Critical thinking*

· Original thinking*

· Researched examples

· *Critical/original thinking: Demonstrate new approaches and/or ability to "push back" rather than simply reproducing another's thoughts. Use direct quotations sparingly and judiciously.  Properly identify any sources and integrate into own thoughts and ideas. 

4. Provide a straightforward, easy-to-follow arrangement with appropriate formatting (eg, section/paragraph headings) to speed reader comprehension.     /10 points

a. Includes: comply with APA-6  format. 

b. Includes: answers clearly marked, and student name included both in file name(s) and within file(s).

1 /**

2 A bank account has a balance and a mechanism for applying interest or fees at

3 the end of the month.

4 */

5 public class BankAccount

6 {

7 private double balance;

8

9 /**

10 Constructs a bank account with zero balance.

11 */

12 public BankAccount()

13 {

14 balance = 0;

15 }

16

17 /**

18 Makes a deposit into this account.

19 @param amount the amount of the deposit

20 */

21 public void deposit(double amount)

22 {

23 balance = balance + amount;

24 }

25

26 /**

27 Makes a withdrawal from this account, or charges a penalty if

28 sufficient funds are not available.

29 @param amount the amount of the withdrawal

30 */

31 public void withdraw(double amount)

32 {

33 balance = balance - amount;

34 }

35

36 /**

37 Carries out the end of month processing that is appropriate

38 for this account.

39 */

40 public void monthEnd()

41 {

42 }

43

44 /**

45 Gets the current balance of this bank account.

46 @return the current balance

47 */

48 public double getBalance()

49 {

50 return balance;

51 }

52 }

1/2

ACO 102: Object-Oriented Programming

Programming Assignment 1

Assignment Date: Monday, October 20, 2014 Assignment Deadline: Start of Class, Monday, November 10, 2014

1. PROJECT OVERVIEW

In this assignment, you are going to design, implement and test a graphical application simulating a bank saving account. Supply text fields, labels, and buttons for depositing and withdrawing money, for adding interests. In addition to the basic requirement of displaying the current balance on a label, you could design and implement a colored bar chart (Chapter 10 section_4_3/ChartComponent.java) to illustrate the balance changes for a total of 20 bonus points.

2. LEARNING OBJECTIVES

 Applying inheritance  Using inheritance to structure the frame for a graphical user interface  Handling events that are generated by buttons  Applying GUI components: BorderLayout, GridLayout, JButton, JFrame, JLabel, JTextField, etc

3. PROJECT REQUIREMENTS The project will implement the following .java prgorams: BankAccount.java, SavingAccount.java, SavingAccountViewer.java, SavingAccountFrame.java. The SavingAccountViewer will include a main method for running the entire GUI for the graphical application.

The SavingAccountFrame will include  An amount label (javax.swing.JLabel) and a text field (javax.swing.JTextField ) for inputting amount  Three buttons ( javax.swing.JButton) for deposit, withdraw, add interest  An account balance label (javax.swing.JLabel) and the actual account balance label (javax.swing.JLabel)  A bar chart (Chapter 10 section_4_3/ChartComponent.java)

10 Bonus Points: a bar chart is used for illustrating balance changes. 10 Bonus Points: the graphical application allows uses to change the color of the bar chart.

2/2

4. SUBMISSION REQUIREMENTS On the due date, you will turn in the following:

1. An electronic copy of your SavingAccountViewer.java, SavingAccountFrame.java, BankAccount.java, SavingAccount.java, must be turned in through the assignment facility on myASU. Make sure that your name and class are included as a comment line in your .java files.

2. A hard copy of your SavingAccountViewer.java, SavingAccountFrame.java, BankAccount.java,

SavingAccount.java. 3. An electronic copy of your SavingAccountViewer.html, SavingAccountFrame. html, BankAccount. html,

SavingAccount.html. (Note: run javadoc command to generate html files) 4. A hard copy of your SavingAccountViewer.html, SavingAccountFrame. html, BankAccount. html,

SavingAccount.html. NOTE: Only programs that successfully compile will be considered for assessment. Quality-Based Assessment: Points will be deducted for each negative answer to the required features shown below as questions. The program will also be assessed for correctness and clarity.

YES NO EXPECTED/REQUIRED FEATURES

Was the assignment submitted via the assignment feature by the due date?

Do the name and class appear as a comment line at the beginning of the .java file?

Do the programs include documentation comments?

Do the program use descriptive variable names and implement the required functions?

Do the programs successfully compile?

Are the hardcopy of programs and HTML files submitted for assessment?

LATE ASSIGNMENTS WILL NOT BE ACCEPTED!

REMINDER: THIS IS AN INDIVIDUAL ASSIGNMENT!

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